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ARM Holdings plc

Annual Report 2013: Governance & Financial Report ARM Holdings plc Governance and Financial Report 2013

ARM’s annual report is in two parts. The Strategic Report contains The Governance and Financial Report contains the details about information about the Group, how we make money and how we run how we run the business and remunerate management, and how the business. It includes our strategy, business model, markets and we organise ourselves financially. key performance indicators, as well as our approach to governance, sustainability and risk management, and a summary of our Online you can find more information about our end markets, financial management. including case studies about how our technology is used in our customers’ products. A more detailed Corporate Responsibility report is also available online. Governance and Financial Report Strategic report Online reporting

Governance Our Vision Front cover Most major population centres are now Chairman’s introduction 1 Operational highlights covered by 3G or 4G networks, and there Board of directors 4 Financial highlights were more than two billion smartphones and tablets connecting to the internet in Corporate governance 6 Chairman’s review 2013. With some mobile computers now costing as little as $35, many more people Directors’ report 23 Chief Executive’s statement can now afford to buy a smart device. Directors’ remuneration report 29 Our Performance An entry-level mobile computer may have up to four ARM®‑based chips. Financial Report Our marketplace Downloads Independent auditors’ report to the Our business model More information about ARM and our members of ARM Holdings plc 55 end market opportunities are available Our global reach on our website. Consolidated income statement 60 Strategy and key Reports available online: Consolidated statement performance indicators of comprehensive income 60 Mobile computing Strategic Report Consolidated balance sheet 61 Enterprise infrastructure Governance and Financial Report Consolidated cash flow statement 62 Embedded computing Corporate Responsibility report Consolidated statement of changes in shareholders’ equity 63 Our Commitment www.arm.com/reporting2013 Notes to the financial statements 64 Governance Company balance sheet/UK GAAP 109 Sustainability Notes to the financial statements/ Risk management and principal risks UK GAAP 110 Our Financial Report Independent auditors’ report to the members of ARM Holdings plc 115 Financial Report

Glossary and Group directory

Glossary 117 Group directory 118 Key shareholder information 120 Governance Financial Report

Chairman’s Introduction A strong and effective governance system

Sir John Buchanan Chairman

This report explains the Board’s commitment to good The Board actively considers long-term strategy, monitors, challenges and supports corporate governance, corporate responsibility and the the work of the Executive Committee, and highest ethical standards. We believe that effective governance is responsible for Board and executive is an essential contributor to our sustained improvement in management succession. My role as Chairman is to provide the leadership to business performance. ensure high quality decision making in all areas of strategy, performance, responsibility “Operating with integrity in all we do is vital to maintain the trust and accountability. of investors, customers, our employees and other stakeholders. As a Board, we have ultimate responsibility This requires leadership, ethical behaviour and collaboration.” for the Group’s performance and for overseeing the management of risk. We seek to do this through a strong and effective Dear shareholder The Board’s aim is to nurture a working governance system and by setting and Welcome to ARM’s 2013 Governance and environment in which the highest standards following the standards that we expect from Financial Report. This is the first year we have of behaviour are established, demonstrated all our employees. These standards are created the annual report as two documents: and maintained in all our activities. This helps enshrined in ARM’s seven shared values, a Strategic Report containing an update on us to run the Group effectively and exercise which are listed below. judgement to manage the risks that we face ARM’s progress during the year, a summary of This part of the report explains how we to levels that are commensurate with the our approach to governance, and our financial comply with good corporate governance nature of our business. There are results; and a separate document giving more principles, describes how the Board detail on governance at ARM and our full well-defined differences in roles between the and its Committees work to provide accounts. We believe that these two executive and non-executive directors and appropriate oversight, and our approach documents together fulfil the best practice their combined contributions as an to risk management and internal control. guidelines given by the UK Government’s experienced, but healthily diverse, team add Risk management and principal risks are also Department for Business Innovation and value to the debate, decision making and covered on pages 47 to 49 of the Strategic Skills. As ever we welcome your feedback, development of strategy that are so crucial report. During 2013, management reviewed and you can contact us via the investor to the Group’s success. and improved our risk assessment and relations website at www.arm.com/ir. reporting framework under the guidance of Kathleen O’Donovan, who chairs the Audit Committee, and with assistance from external advisers. We need to ensure that

1 ARM Holdings plc Governance and Financial Report 2013

Chairman’s Introduction continued

our processes are fit for purpose, and that the Chairman of Rexam plc and a non-executive Reports from the various Board Committees information that comes to the Board focuses director of Tesco PLC. Up to 2009, he was and details of their current composition are on the principal risks and appropriately informs the Group Chief Executive of Nippon Sheet covered in more detail in the Corporate our ongoing risk appetite discussions. Glass Group which acquired Pilkington plc in Governance and Remuneration reports below. 2006, where he was Chief Executive. Prior to Directors and succession planning the glass industry, Stuart held a number During 2013, the Board played an important As part of our planned and continuing of senior positions at Mars, Inc., having role in successfully guiding ARM through evolution of the Board there were a number previously spent ten years in several European the Chief Executive Officer transition and of changes in 2013, and further changes are roles at Royal Dutch Shell plc. ensuring that the Group’s performance planned in 2014. targets were achieved in the challenging It has been a great privilege to serve as and competitive economic environment. Simon Segars succeeded Warren East as Chairman of ARM and I have greatly enjoyed The Board also provided clear strategic Chief Executive Officer on 1 July 2013 and my time on the Board of this fine company. direction and ensured that the Group’s the strong financial performance achieved for Due to the medical uncertainties, it is right standards of conduct met its expectations. the full year demonstrates that the transition that I should step aside at this time and I wish has been seamless and well executed. the Group well under its new leadership. I will The roles and specific expertise of the current The Board was delighted to have a candidate continue as an independent non-executive members of the Board are set out in the of Simon’s experience and calibre within ARM director until the AGM on 1 May 2014 and Biographies section on pages 4 to 5. to appoint to this role. Following an extensive will then retire from the Board. Diversity externally conducted review of candidates worldwide, Simon’s proven technology Philip Rowley will also be retiring from the After the changes referred to above, the expertise and management skills across a Board at the AGM, on the ninth anniversary Board will comprise three executive directors, range of senior executive roles resulted in of his election by shareholders. On behalf the Chairman, and five non-executive him being selected. His initiatives in the period of the Board I want to express our deep directors. At the year end there were eight since his appointment, including changes to appreciation to Philip for his excellent, wide men (80%) and two women (20%) which the organisation structure to better address ranging contributions during his tenure. broadly reflects the gender diversity of ARM’s the needs of our customers, confirm that he He chaired the Remuneration Committee workforce as a whole. is highly qualified to take the Group forward. until 31 December 2013, before that was Chairman of the Audit Committee, and he Diversity of the Board Warren retired after nearly 12 years as CEO has also been a long-standing member of the and 19 outstanding years with the Group. Nomination Committee. We offer our deep Men 80% Women 20% He built a strong platform for growth and thanks and wish him well for the future. consistently created value for shareholders, even in a challenging external environment. The Board reflects a balance between On behalf of the Board and the wider ARM technology sector, commercial, financial team, deep thanks are due to Warren for his and general business skills, with a highly passion, service and leadership. The Board experienced international team leading the was delighted to see Warren’s achievements business in both executive and non-executive acknowledged through the award of a CBE in roles. We were pleased to welcome Eric Meurice to the Board in July 2013. He brings the 2014 New Year’s Honours List. Mike Inglis The Board noted the publication of Lord a wealth of experience of the semiconductor also retired from the Board on 31 March Davies’ Review into Women on Boards in industry having been President and CEO of 2013 and left with our sincere thanks and February 2011 and the proposals published ASML Holding NV (a leading provider of good wishes. by the European Commission in November manufacturing equipment and technology 2012 (the latter of which includes an objective In January 2014 we announced that, with to the semiconductor industry) from 2004 that 40% of non-executive directors should much regret, I have requested that I step until 2013. down as Chairman of ARM, due to a medical be women by 2020). We believe that diversity condition. The Board conducted a thorough The Nomination Committee is seeking further should be considered broadly, as well as search, led by the Senior Independent candidates as independent non-executive focusing on gender. It is important to achieve Director, and was pleased to welcome directors with appropriate skills, experience the correct balance of skills, knowledge and Stuart Chambers to the Board as Chairman and diversity to complement our existing experience on the Board. We will continue designate on 27 January 2014. He took over Board members and maintain, collectively, to make appointments on merit and also to as Chairman on 1 March 2014. Stuart is an effective Board. value diversity in its broadest context.

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Development of strategy Remuneration and training programmes to ensure that The Board’s work on defining our short- and ARM’s remuneration policy seeks to all employees worldwide understand the long-term strategic priorities at this important align the interests of executive directors, requirements of all relevant legislation, stage in the Group’s development is receiving senior management and shareholders, including the UK Bribery Act 2010 (and increased focus. We undertook a detailed and is structured to enable the Group its global reach) and the principles of and strategy review in September and the next in- to attract, motivate and retain the talent importance of compliance with competition depth strategy meeting is scheduled for April required to deliver the business strategy. law and anti-trust law. The Compliance 2014. This meeting will focus on progress to The Remuneration Committee, under Philip Committee reviews a range of activities date and future plans to take advantage of Rowley’s chairmanship, undertook a review across the Group, sets appropriate policies the significant opportunities that have been of executive remuneration policy during 2012, and procedures, and takes the lead in identified. These opportunities are in areas which resulted in the approval of our new ensuring compliance with them. It reports that include the evolving Internet of Things, Long-Term Incentive Plan by shareholders on its activities to the Board through efficient networking, ARM-powered servers at the 2013 AGM. The changes, which take the Committee. and security applications. More details are effect in 2014, reflect the latest guidelines and Employee performance is measured each year included in the Strategic report that forms the the desire of shareholders for: against a set of seven shared values: other part of ARM’s Annual Report 2013. the simplification of incentive plans Delivery of results that benefit ARM Corporate governance framework for executives; and role of the Board Teamwork and selflessness longer holding periods for shares; The Group’s corporate governance Constructive pro-activity framework is built around three pillars: increased share ownership requirements. Partner and customer focus Organisation, structure and processes. Details of how these principles have been Responsiveness The internal control framework. applied are included in the policy section of the Remuneration report. As was the case Innovation Independent assurance. last year, we also include total remuneration figures for executive directors in the report. Personal development ARM has its primary listing on the London Stock Exchange and is also listed on The Board is cognisant of the general Corporate responsibility the NASDAQ Stock Market in the US. sensitivity relating to executive director remuneration. We are committed to the Full details of our CR strategy and Throughout 2013, the Group complied achievements can be found in the main CR fully with the UK Corporate Governance principle that there should be no reward for failure and believe that the increased emphasis report www.arm.com/reporting2013 and Code (September 2012) and also with the a summary of highlights from the year are Sarbanes-Oxley Act 2002 (US). The Board on long-term performance-related pay, longer holding periods and increased shareholding included in the Sustainability section of the values good corporate governance and this Strategic Report on page 44. is reflected in our governance principles, requirements are appropriate and ensure policies and practices, and our everyday that ARM’s remuneration policy does not I hope the following reports demonstrate that working processes. This approach is backed encourage inappropriate risk taking. setting the corporate governance framework by continuous improvement based on Ethics and values continues to be a key focus for the Board. measurement against internal and external We must always be conscious of the fact audits by both Lloyds Register Quality All directors and employees are required that the Board’s primary responsibility is to Assurance and the external auditors, to act fairly, honestly and with integrity, and promote the long-term success of the Group benchmarking and a rigorous approach to to demonstrate that they have read and for the benefit of customers, employees and risk management. understand the Group’s Code of Business shareholders and I am confident that we are Conduct and Ethics, a copy of which is well positioned to continue to provide value published on the corporate website at to all our stakeholders. www.arm.com. Our Human Rights Policy is now incorporated in our Code of Business Conduct and Ethics. Sir John Buchanan Chairman (until 1 March 2014) As part of our commitment to the highest 5 March 2014 standards of business conduct and ethics, we have implemented enhanced communication

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Board of Directors The experience of the team

ARM’s Board has the breadth Stuart Chambers 57 Simon Segars 46 and depth of experience necessary to guide the Group as it seeks to take full advantage of new Chairman opportunities and contend (from 1 March 2014) Chief Executive Officer with new challenges. Committees Committees Nomination Committee (Chairman) (from 1 March 2014) None Biographical details of the Current directorships Current directorships directors as at the date of Rexam plc (Chairman) SOI Industry Consortium (director) this report are as follows: Tesco plc (independent non-executive director) EDA Consortium (director) Time on Board Time on Board 1 month 9 years 2 months Expertise Expertise Sir John Buchanan 70 Stuart Chambers joined the Board as Chairman designate on Simon Segars joined the Board in January 2005 and 27 January 2014 and became Chairman on 1 March 2014. was appointed Chief Executive Officer on 1 July 2013. He brings a strong track record and a wealth of Board and His previous roles include President, leading the IP divisions executive experience both in the UK and globally. Up to and representing them on the Board, EVP and General 2009, he was the Group Chief Executive of Nippon Sheet Manager of the Processor and Physical IP Divisions and prior Glass Group, which acquired Pilkington plc in 2006, where he to that, EVP, Engineering, EVP, Worldwide Sales and EVP, was Chief Executive. Prior to the glass industry, Stuart held Business Development. He joined ARM in early 1991 and Chairman a number of senior positions at Mars, Inc., having previously worked on many of the early ARM CPU products. He led the spent ten years in several European roles at Royal Dutch development of the ARM7TM and ARM9TM Thumb® families. (until 1 March 2014) Shell plc. He holds a number of patents in the field of embedded CPU architectures. Committees Nomination Committee (Chairman) (until 1 March 2014) Current directorships Tim Score 53 Andy Green 58 Smith & Nephew plc (Chairman) BHP Billiton plc (Senior Independent Director) International Chamber of Commerce (UK) (Chairman) Chairman of the UK Trustees for the Christchurch Earthquake appeal Time on Board Independent I year 10 months Chief Financial Officer Non-Executive Director Expertise Committees Committees John Buchanan joined the Board as Chairman on 3 May Risk Review Committee Remuneration Committee 2012. His intention to retire from the Board, due to a medical condition, was announced on 27 January 2014. Compliance Committee Nomination Committee He handed over the role of Chairman on 1 March 2014 and will retire from the Board at the AGM on 1 May 2014. Current directorships Current directorships He has broad international experience gained in large and National Express Group plc (Senior Independent Director and Dock On AG (Chairman) complex businesses. He has experience and knowledge of Chairman of the Audit Committee) until 25 February 2014 Networking People (UK) Limited (Chairman) the international investor community and has held various Time on Board UK Government Connected Digital Economy Catapult leadership roles in strategic, financial, operational and 12 years (CDEC) (Chairman) marketing positions, including executive experience in different countries. He is a former Chief Financial Officer of BP plc and Expertise ABESU (Trustee and director) a former Deputy Chairman and Senior Independent Director Tim Score joined ARM as Chief Financial Officer and director Time on Board of Vodafone Group plc. in March 2002. Before joining ARM, he was Finance Director 3 years 1 month of Rebus Group Limited. He was previously Group Finance Director of William Baird plc, Group Controller at LucasVarity Expertise plc and Group Financial Controller at BTR plc. Andy Green joined the Board in February 2011. He was CEO of Logica plc from 2008 to 2012. He is a former CEO of BT Global Services and a former CEO of Group Strategy and Operations at BT plc and was CEO of BT Openworld. He is Chair of e-Skills UK (the UK Sector Skills Council for Business and Information Technology), is on the Board and the President’s Committee of the CBI and is a Companion of the Chartered Management Institute.

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Larry Hirst 62 Eric Meurice 57 Mike Muller 55

Independent Independent Non-Executive Director Non-Executive Director Chief Technology Officer

Committees Committees Committees Remuneration Committee (Chairman from 1 January 2014) Audit Committee (from 1 January 2014) Risk Review Committee (Chairman) Audit Committee (until 31 December 2013) Current activities Current directorships Current directorships ASML Holding NV (Chairman) Intelligent Energy Limited MITIE Group plc (non-executive director) Time on Board Trustonic Limited Time on Board 7 months Time on Board 3 years 2 months Expertise 12 years 5 months Expertise Eric Meurice joined the Board in July 2013. He was President Expertise Larry Hirst joined the Board in January 2011. He is the former and Chief Executive Officer of ASML Holding NV from Mike Muller was one of the founders of ARM. Before joining Chairman of IBM Europe, Middle East and Africa. He retired October 2004 until 30 June 2013 and will continue as the Group, he was responsible for hardware strategy and from IBM in 2010 having previously held a wide range of senior their Chairman until 31 March 2014. Former roles include the development of portable products at Acorn Computers. positions since joining the company in 1977. He currently Executive Vice President of Thomson Television Worldwide He was previously at Orbis Computers. At ARM he was VP, chairs the Imperial College Digital Cities Exchange. He is and head of Dell Computers’ Western, Eastern Europe Marketing from 1992 to 1996 and EVP, Business Development also an Ambassador to Monitise plc and on the International and EMEA emerging market businesses. He also gained until October 2000 when he was appointed Chief Technology Advisory Board for British Airways. Former roles include extensive technology experience in the semiconductor Officer. In October 2001, he was appointed to the Board. being a UK Business Ambassador, a Commissioner for the industry between 1984 and 1994 at Intel and then at ITT Commission for Employment and Skills, and Chair of e-skills Semiconductors Group. UK (the UK Sector Skills Council for Business and Information Technology). He was awarded a CBE in 2006.

Kathleen O’Donovan 56 Janice Roberts 58 Philip Rowley 61

Senior Independent Independent Independent Non-Executive Director Non-Executive Director Non-Executive Director

Committees Committees Committees Audit Committee (Chairman) Audit Committee Remuneration Committee (Chairman until Nomination Committee Remuneration Committee 31 December 2013) Audit Committee Current directorships Current directorships Invensys Pension Trustee Ltd (Chairman) Mayfield Fund (Venture Adviser) Nomination Committee Trinity Mirror plc (Non-Executive Director and Chairman of RealNetworks, Inc. (Non-Executive Director) Current directorships the Audit Committee) Zebra Technologies Corporation (Non-Executive Director) Promethean World plc (Non-Executive Director and D S Smith Plc (Non-Executive Director) Chairman of the Audit Committee) Time on Board Livestation Limited (Chairman) Time on Board 3 years 2 months 7 years 3 months Pouncer Media Limited (Chairman) Expertise Expertise Janice Roberts joined the Board in January 2011. She is a Time on Board Kathleen O’Donovan joined the Board in December 2006. Venture Adviser at Mayfield Fund having been a Managing 9 years 2 months Previously she was a non-executive director and Chairman of Director from 2000-2013. Mayfield is a Silicon Valley-based Expertise the Audit Committees of the Court of the Bank of England, venture capital firm with approximately $3 billion under Philip Rowley joined the Board in January 2005 and will be Great Portland Estates plc, EMI Group plc and Prudential plc management, where her focus is on the mobile, wireless, retiring at the 2014 AGM. He was Chairman and CEO of and a non-executive director of O2 plc. Prior to that, she was communications and consumer technology industries. AOL Europe, the internet services and web brands provider Chief Financial Officer of BTR plc and Invensys plc, and before Prior to that, she held various executive positions at 3Com until February 2007 and Chairman of HMV Group plc until that she was a Partner at Ernst & Young. Corporation, including President Palm Computing, President early 2013. He is a qualified chartered accountant and was 3Com Ventures and Senior Vice President, Business Group Finance Director of Kingfisher plc from 1998 to 2000 Development and Global Marketing. She is a director of and Deputy CEO and CFO of the General Merchandise several private technology companies in the US. Division until 2001. Prior to that, his roles included EVP, Chief Financial Officer of EMI Music Worldwide.

5 ARM Holdings plc Governance and Financial Report 2013

Corporate governance A balanced Board structure This section and the Remuneration report detail how the Group has applied the principles of good governance contained in the UK Corporate Governance Code (September 2012).

Compliance statement Board The Board has a formal schedule of The Group has complied with the provisions The Board is collectively responsible for the matters specifically reserved for its decision, of the UK Corporate Governance Code overall conduct of the Group’s business. which include: throughout 2013 and to the date of this Group strategy and major document. The Group also achieved full The Board’s core activities include: business decisions; compliance with the requirements of section providing leadership for the Group; 404 of the Sarbanes-Oxley Act 2002 (US) for annual budgets and long-term plans; the eighth successive year. The Company’s active engagement in developing the American Depositary Shares are listed on Group’s long-term strategy; major capital expenditure, acquisitions, NASDAQ and we are therefore subject to disposals and investments; and comply fully with NASDAQ rules, US monitoring executive actions, standards financial reporting, controls and Securities laws and Securities and Exchange of conduct, performance against business financial structure; Commission rules to the extent that they plans and budgets and ensuring that the apply to foreign private issuers. We explain necessary financial resources and people shareholder communications; in the reports below how we applied the are in place for the Group to meet provisions and principles of the FCA Listing its objectives; key policies; Rules, the Disclosure and Transparency Rules, obtaining assurance that material risks to key advisers. and the UK Corporate Governance Code the Group are identified, that appropriate throughout the year. systems of risk management and control The schedule was reviewed in January 2014. exist to mitigate such risks and defining the Group’s appetite for risk; Composition and operation of the Board Board and executive At the end of 2013, the Board comprised management succession; three executive directors (the Chief Executive Officer, the Chief Financial Officer and the responsibility for the long-term success Chief Technology Officer), the Chairman, of the Group having regard to the interests and six independent non-executive directors. of all stakeholders; Stuart Chambers was appointed to the Board responsibility for ensuring the effectiveness as Chairman designate on 27 January 2014. of and reporting on our system of Their biographies appear on pages 4 to 5. corporate governance. John Buchanan and Philip Rowley will be retiring from the Board at the 2014 AGM.

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Board and Committee structure

Chairman Stuart Chambers

Key objectives: leadership, operation and governance of the Board.

Board 11 directors – three executive directors, the Chairman and seven independent non-executive directors.

key objectives: the overall conduct of the Group’s business and setting the Group’s strategy.

Nomination Audit Remuneration Chief executive Committee Committee Committee officer Three independent Four independent Four independent Simon Segars non-executive directors, non-executive directors, non-executive directors, Chairman Stuart Chambers. Chairman Kathleen Chairman Larry Hirst. O’Donovan.

key objectives: key objectives: key objectives: key objectives: to make recommendations to the to monitor the integrity of the to review and make to manage the Group’s business Board for future appointments to Group’s financial statements, to recommendations to the Board and, with the Executive Committee, ensure that the Board comprises review the effectiveness of the on executive remuneration. to implement Group strategy individuals with appropriate skills, Group’s internal controls over and policies. knowledge and experience financial reporting, and to provide to be effective in discharging oversight for the Group’s risk its responsibilities. management systems.

Risk Review Committee Executive Committee Disclosure Committee Two executive directors, two other 14 members including the executive Six members chaired by the Chief Executive Committee members and two directors, key division and function Executive Officer and including three senior executives, Chairman Mike Muller. heads, Chairman Simon Segars. other Executive Committee members.

key objectives: key objectives: key objectives: to identify and evaluate risks which may impact to focus on strategy, the day-to-day running to ensure that disclosures made to the Group’s strategic and business objectives of the business, financial and competitive shareholders and the investment community and to monitor the progress of actions performance, organisational development, are accurate and complete. designed to mitigate such risks. succession planning and implementation of policies.

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Corporate governance continued

Conflicts The other non-executive directors have Board meetings The Board is fully aware of the other shorter service and are regarded as Board and Committee papers are circulated commitments of the former and current independent in character, judgement and electronically before each meeting. Chairman, and the executive and non- behaviour, based on both participation and The business considered at each Board executive directors. All directors have performance at Board and Committee meeting includes the Chief Executive completed conflicts of interest questionnaires meetings. There are no relationships or Officer’s report on the status of the business, and any planned changes in their directorships circumstances that are likely to affect the (incorporating industry and strategic outside the Group are subject to prior judgement of any of them. It is the policy development) and the Chief Financial approval by the Board. No conflicts of of the Board to review the continued Officer’s report (incorporating financial, interest arose in 2013 or to date in 2014, appointment of non-executive directors market and investor-related information). and no other situations have been identified after six years’ service. Both Sir John On a cyclical basis, Board agendas also include that might lead to a conflict of interest. Buchanan and Stuart Chambers were detailed assessments of risk, governance, In circumstances where a potential conflict regarded as independent at the time of their corporate responsibility, public affairs, arises, the Board (excluding the director respective appointments as Chairman and performance by division and geographical concerned) would consider the situation Chairman designate. area, competitive landscape, R&D and and either authorise the arrangement in Non-executive directors’ expertise organisation/succession planning. accordance with the Companies Act 2006 Kathleen O’Donovan has been the Senior and the articles of association or take other Approximate allocation of Board agenda time in 2013 appropriate action. Independent Director since January 2011. In this capacity she acts as a sounding Strategy and risk 51% Independence board for the Chairman and provides Business updates/ a communication channel between the financial reporting 30% The Board reviewed the independence of Division and the non-executive directors on appointment Chairman and the non-executive directors. function updates 12% and continues to do so on an ongoing She is also available to discuss matters with Governance 7% basis. The independence of the longer shareholders, if required. During 2013 serving non-executive directors, Kathleen and early 2014, she led the Nomination O’Donovan and Philip Rowley, has been Committee through the process to identify considered. Kathleen O’Donovan, who has and recommend the recruitment of the new Chairman. In the event that a director is unable to attend now served for seven years, remains highly a meeting or participate by conference call, committed and continues to be regarded Janice Roberts (who is based in Silicon Valley), they receive and read the documents for as independent. In her capacity as Senior Larry Hirst, Andy Green and Eric Meurice all consideration at that meeting, and have the Independent Director and Chairman of have a broad understanding of the Group’s opportunity to relay their comments and, if the Audit Committee her independence technology and the practices of major US- necessary, to follow up with the Chairman or is demonstrated on many occasions each based technology companies. Philip Rowley the Chief Executive Officer after the meeting. year through her robust approach to and Kathleen O’Donovan are both financial questioning management. Philip Rowley, experts with strong financial backgrounds. The non-executive directors are encouraged who will be retiring from the Board in May The beneficial interests of the directors in the to suggest matters for Board discussions, and 2014, has demonstrated his independence share capital of the Company are set out in in 2013 they were active in contributing to the on many occasions during his tenure in the Remuneration report. agenda for the strategy review and ensuring both his interactions with management and the amount of time spent on strategic shareholders on remuneration matters. and operational issues was appropriately balanced. The independently conducted Board evaluation in 2013 confirmed that the September 2013 strategy meeting was considered to be thorough and informative. An additional strategy meeting has again been scheduled during 2014 and strategy will continue to be covered regularly at Board meetings during the year.

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During 2013, the non-executive directors Scheduled Conference calls/ encouraged the executive team to allocate Board meetings ad hoc meetings resources to accelerate the development of Number 6 6 technology in the Internet of Things arena. Sir John Buchanan 6/6 5/6 A new group was set up in 2013 to focus on the Internet of Things and has been enhanced Simon Segars 6/6 6/6 by the acquisition in July 2013 of Sensinode, Andy Green 6/6 6/6 which has developed software for connecting Larry Hirst 5/6 6/6 wireless low-power, low-cost devices to the internet. Eric Meurice 2/3 3/3 Mike Muller 6/6 5/6 Key senior executives attend Board meetings Kathleen O’Donovan 6/6 5/6 throughout the year, which gives the non- executive directors visibility of executive Janice Roberts 6/6 5/6 talent below executive director level, direct Philip Rowley 6/6 6/6 information about business developments, Tim Score 6/6 5/6 and informs them on potential management, succession. In particular, each year the general Warren East (retired 30 June 2013) 3/3 3/3 managers of the divisions present a review of Mike Inglis (retired 31 March 2013) 2/2 1/1 past performance against key objectives and KPIs, and their proposals for the coming year. Chairman The Chairman has primary responsibility for running the Board and the Chief Executive During 2013, the Chairman held at least two As previously announced and also explained Officer has executive responsibility for the meetings with the non-executive directors on page 2, Sir John Buchanan retired operations and results of the Group, and without the executives present, and the as Chairman on 1 March 2014 and will also for making proposals to the Board in non-executive directors met on at least one leave the Board at the close of the AGM relation to the strategic development of the occasion without the Chairman being present. on 1 May 2014. He is also Chairman of Smith & Nephew plc and the International Group. The Board recognises that the roles The table above shows directors’ attendance Chamber of Commerce (UK), and is Senior of the Chairman and Chief Executive Officer at scheduled Board meetings, conference calls Independent Director of BHP Billiton plc. are distinct (as described below) and also and ad hoc meetings which they were eligible He has attended all meetings and conference the importance of establishing an excellent to attend during the 2013 financial year. calls since the date of his appointment and working relationship between them. also several induction sessions, meeting During 2013, there were regular meetings members of the executive team and a range and calls between the Chairman and the of senior managers to increase his knowledge Chief Executive Officer outside Board and understanding of the various parts of the meetings. These discussions provided and business and its operations. continue to provide opportunities for the Stuart Chambers joined the Board on exchange of information, mentoring and 27 January 2014 and took over from Sir regular updates on the list of priorities that John Buchanan as Chairman on 1 March the Board set for the Chief Executive Officer 2014. He is Chairman of Rexam plc and on his appointment. These priorities include: an independent non-executive director development of the organisation and the next of Tesco plc. generation of executives, working effectively with the Board, ensuring appropriate strategic decisions are made on investments, employee motivation, and customer focus.

9 ARM Holdings plc Governance and Financial Report 2013

Corporate governance continued

Main responsibilities of the Chairman include: Chief Executive Officer Annual Report, information and Main responsibilities of the Chief Executive communication with shareholders leadership of the Board and creating the Officer include: and other stakeholders conditions for overall Board and individual The ultimate responsibility for reviewing and director effectiveness, and a constructive proposing and developing the Group’s approving the Annual Report and the quarterly relationship with good communication strategy and overall commercial earnings releases, and for ensuring that they between the executive and non- objectives in conjunction with the present a balanced assessment of the Group’s executive directors; Executive Committee; position, lies with the Board. ensuring that the Board as a whole day-to-day management of the The Board delegates day-to-day responsibility plays a full and constructive part in the Group’s business; for managing the Group to the Executive development of strategy and overall Committee and has a number of other commercial objectives; chairing the Executive Committee; Committees, details of which are set out on chairing the Nomination Committee, maintaining a close working relationship the following pages. which initiates succession planning with the Chairman; Investor relations to retain and build an effective and meeting regularly with ARM’s leading complementary Board; The Board makes considerable efforts to customers for executive discussions on establish and maintain good relationships ensuring that there is effective broad strategic and industry trends; with shareholders and the wider investment communication with shareholders and community. There is regular dialogue with hosting discussions with influential that members of the Board develop an institutional investors during the year, except media outlets; understanding of the views of the major during close periods. The main channel of investors in the Group; fostering good relationships with communication continues to be through the ARM’s larger shareholders and major Chief Executive Officer, the Chief Financial promoting the highest standards financial institutions; Officer and the VP of Investor Relations. of integrity, probity and corporate The Chairman, the Senior Independent governance throughout the Group, representing the organisation in various Director and the other directors are particularly at Board level; industry organisation and professional available to engage in dialogue with major associations, and activities within the local ensuring that the performance of the shareholders as appropriate. Beginning in community and at international level. Board as a whole, its Committees 2012, the Chairman of the Remuneration and individual directors is formally and Committee and the Chairman consulted with Company Secretary rigorously evaluated at least once a year. shareholders on the terms of the new Long Patricia Alsop acts as Secretary to the Board Term Incentive Plan, which was approved at and Board Committees, and all Board the 2013 AGM. Philip Rowley also consulted members have individual access to her with major shareholders over incentive advice. She ensures that the Board receives programmes in 2013 and early in 2014. all relevant information in a timely manner, organises induction and training programmes, The Board encourages communication and facilitates the Board evaluation in years with private investors and part of the when this is conducted internally. She is also Group’s website is dedicated to providing responsible for ensuring that the correct information for all investors, including Board and Committee procedures are responses to frequently asked questions, followed and advises the Board on corporate the investment case, product information, governance matters. The established press releases, RNS and Securities and procedure under which directors can, where Exchange Commission (SEC) announcements, appropriate, obtain independent legal or and an interactive online version of the other professional advice at the Group’s Annual Report. expense is also administered through her.

10 Governance Financial Report

At present, over 30 sell-side analysts write Board evaluation the size, composition and mix of the Board; research reports on the Group and their The Board undertakes an annual review of its details appear on the Group’s website. effectiveness. In order to provide the longest succession planning both within Shareholders can also obtain telephone possible period in which to evaluate the the executive team and the non- numbers from the website, enabling them performance of the Board following the change executive directors; to listen to earnings presentations and audio of Chief Executive Officer in July 2013, the providing improved visibility of the conference calls with analysts. In addition, Board evaluation was deferred until late 2013. strategic planning and review process webcasts or audiocasts of key presentations This exercise was conducted by an external to the non-executive directors; are made available through the website. provider, Independent Audit, who had detailed Members of the Board develop an individual discussions with all members of the the number and scheduling of understanding of the views of major Board, four senior executives and the external Board meetings; audit partner. The findings were reported shareholders through any direct contact increased focus on strategy which has been that may be initiated by shareholders, or to the Board in January 2014 and were the subject of detailed discussion by the Board in addressed by the Chief Executive Officer through analysts’ and brokers’ briefings. including a strategy update within each of The Board also receives feedback from the February 2014. Neither the Group nor any individual director has any connection with his reports and scheduling an additional Group’s brokers and financial PR advisers, full‑day meeting in April 2014; who in turn obtain feedback from analysts Independent Audit. and brokers following investor roadshows. The 2013 evaluation covered: a continuing programme of development All shareholders can register to receive the sessions/teach-ins for the non-executive Group’s press releases via the internet. Board composition and dynamics; directors in order to provide them with a more detailed appreciation of possible AGM the Board’s role; strategic and technological developments. The Board actively encourages participation at the operation of the Board, which was The first of these, on the Internet of the AGM, scheduled for 1 May 2014, which is observed first hand; Things technology, was held in February the principal forum for dialogue with private 2014 and further sessions are planned; shareholders. The Circular and Notice of AGM the operation of each of the are being sent to shareholders concurrently Audit, Remuneration and continuing development and with the distribution of this report, which is well Nomination Committees. documentation of risk assessment in advance of the required 20 working days and risk appetite. before the meeting. A presentation is made The overall conclusion was that individual outlining recent developments in the business Board members are satisfied that the Board and an open question-and-answer session works well and operates effectively in an follows to enable shareholders to ask questions environment where there is constructive about the business in general. The Chairman, challenge from the non-executive directors. who chairs the Nomination Committee, They are also satisfied with the contribution will be present at the AGM. He will arrange made by their colleagues and that Board for the respective chairs of the Audit and Committees operate properly and efficiently. Remuneration Committees to be available to There are a number of areas for further answer questions and for all directors to attend. consideration and action in 2014 including: All resolutions proposed at the 2014 AGM will be decided on a poll and the voting results will be published via RNS and the SEC, and will also be available on the Group’s website.

11 ARM Holdings plc Governance and Financial Report 2013

Corporate governance continued

The non-executive directors will also meet Training appropriate. In recognition of the increasing with the Chairman outside Board meetings importance of Asia as both a market and on a more frequent basis to discuss any issues Board members receive guidance on the an engineering base, the President of ARM and concerns, which will provide opportunities regulatory regimes and corporate governance Greater China, who is based in China, was for greater sharing of views and understanding framework that the Group operates under. appointed as an Executive Committee without impacting on the business of Board In particular, during 2013 the Board received observer on 1 January 2014 and now attends meetings themselves. An internally facilitated an update from the Company Secretary on all meetings. Board evaluation will take place during 2014 current governance topics including executive and the Board intends to continue with a cycle remuneration and Board diversity. The Group Biographies of the members of the Executive of external evaluations every three years with has a commitment to training and all directors, Committee appear on the Group’s website at internal evaluations in between. executive or non-executive, are encouraged www.arm.com. to attend suitable training courses at the Induction Group’s expense. Management structure The Group has a traditional UK Board A personalised induction programme is Terms of reference arranged for new directors, tailored to their structure with a unitary Board comprising specific requirements, the aim of which is to The terms of reference of the Audit, the Chairman, executive and non-executive introduce them to key executives across the Remuneration and Nomination Committees directors. The Audit and Remuneration business and to enhance their knowledge and are published on the Group’s website at Committees are made up of independent understanding of the Group and its activities. www.arm.com. non-executive directors and they, together with the Nomination Committee, report to In 2013, this included continuation of the Executive Committee programme for Sir John Buchanan and a new the Board. The divisions and functions report programme, which will continue during 2014, The Executive Committee is responsible for to the Executive Committee. The Risk Review for Eric Meurice who joined the Board in July developing and implementing the strategy Committee reports periodically to the 2013. An induction programme is underway approved by the Board. In particular, the Executive Committee, Audit Committee and for Stuart Chambers, who was appointed Committee is responsible for ensuring the Board. The VP Business Assurance/Head to the Board on 27 January 2014 and took that the Group’s budget and forecasts are of Internal Audit also has a separate reporting over the Chairman role on 1 March 2014. properly prepared, that targets are met, and line to the Chairman of the Audit Committee. During the first three months this will include for generally managing and developing the several days with the Chief Executive Officer business within the overall budget. In addition, in Silicon Valley to see the Group’s operations the Committee ensures that risks identified and meet senior executives based there, in through the Operational Planning process, addition to a series of individual meetings particularly corporate-level risks, are managed with Board members, senior executives and and mitigated to the greatest extent possible. external advisers based in the UK. Variations from the budget and changes in All members of the Board are encouraged strategy require approval from the main Board to spend time outside Board meetings with of the Group. The Executive Committee, members of the Executive Committee which meets monthly, now comprises the and senior management and a number of Chief Executive Officer, Chief Financial individual meetings took place during 2013, Officer, the Chief Technology Officer, which will continue during 2014. All Board the Chief Operating Officer, the Chief members are invited to attend the annual Information Officer, the EVP and President ARM Partner Meeting in the UK, which Product Groups, the EVP and President of is the Group’s key customer event of the Commercial and Global Development, the year and/or the ARM TechCon in the US. EVP Strategy, the EVP and General Manager Board members are also invited to attend the Physical Design Group, the General Manager annual Analyst and Investor Day. These events of the Internet of Things business unit, the offer the opportunity to understand more Chief Marketing Officer, the EVP People, the about the business, products, technology General Counsel and the Company Secretary. development roadmap, customer base and Executive Committee meetings are attended investor perspective. by other senior operational personnel, as

12 Governance Financial Report

MANAGEMENT STRUCTURE

Remuneration Committee Holdings Board Audit Committee Nomination Committee

Disclosure Committee Board

Executive Committee

Corporate Business Travel Operations Risk Compliance Responsibility Assurance / Policy Committee Committee Review Committee Committee Committee Internal Audit

Energy Use and Climate Change IT Committee Committee Committees

Operations Management Customer Corporate Product Business Sales Review Team System Team Satisfaction Team Approval Team Review Meeting Commission Meeting

Security Health, Safety and Business KPI Financial Review Team Environment Team Continuity Team Sign Off Meeting Governance Review Teams Operational Review Meetings

13 ARM Holdings plc Governance and Financial Report 2013

AUDIT COMMITTEE

Kathleen O’Donovan Committee Chairman

“The Committee’s key objectives are to provide effective The Chairman of the Audit Committee reports to the Board on how the Committee financial governance and to assist the Board in ensuring the has discharged its responsibilities. integrity of the Group’s financial reporting. The Committee On 1 January 2014, Eric Meurice joined the oversees the external and internal audit processes, and reviews Committee and Larry Hirst stepped down as the risk management framework, the effectiveness of the risk a member, on his appointment as Chairman management processes, and the system of internal control. of the Remuneration Committee. The Committee will continue to evolve its activities in the light Representatives of the Group’s external auditors have a private session with the of guidance from regulators and prevailing economic conditions.” Committee at the start of each meeting, without other management being present. The Chairman of the Committee also has separate meetings with the VP Business Committee composition and meeting Assurance/Head of Internal Audit, the attendance during 2013 Chairman of the Risk Review Committee, the external auditors, the Chief Financial Name of director Position Meetings attended Officer and the VP Finance, ARM Group Kathleen O’Donovan Senior Independent Director, Committee Chairman 6/6 during the year to discuss their ongoing work Larry Hirst Independent non-executive director 5/6 and any areas of concern, and also to invite Janice Roberts Independent non-executive director 6/6 certain members of management to report on key areas of risk and control. Philip Rowley Independent non-executive director 6/6 During 2013, the Chairman of the Kathleen O’Donovan has chaired the VP Finance, ARM Group, the VP Business Committee and the external audit partner Committee since January 2011. She is Assurance/Head of Internal Audit, the Head again organised a meeting for the UK-based qualified as the Committee financial expert of Tax, and the Company Secretary attend PricewaterhouseCoopers LLP audit and as defined in the Sarbanes-Oxley Act 2002 all meetings in order to ensure that all the tax teams and the ARM finance and tax (US). Philip Rowley is also qualified to fulfil this information required by the Committee for it teams to discuss the audit approach, and to role. Both have recent and relevant financial to operate effectively is available. The Group understand the planning for the year end, and expertise in compliance with the Code Chairman and other Board members also to gain insights into the corporate governance provision C3.1. The external auditors, Chief attend Committee meetings from time to time. environment and the Group’s expectations Executive Officer, Chief Financial Officer, the from the internal and external audit processes.

14 Governance Financial Report

In line with the requirement in the UK considering and approving the assumptions Financial reporting judgements: Corporate Governance Code applicable in the annual goodwill impairment review, Each quarter, the Committee reviewed to financial years commencing on or after prior to approval by the full Board. accounting papers prepared by management 1 October 2012, based on both internal and on areas of financial reporting judgement external audit reviews and confirmations from reviewing the status of Sarbanes-Oxley and matters giving rise to exceptional items. management, the Committee and the Board compliance and testing. These included: believe that the Annual Report taken as a whole is fair, balanced and understandable considering any whistleblowing reports (of Consideration of the accounting treatment and provides the information necessary which there were none in 2013). of substantial transactions, including any for shareholders to assess the Company’s implementing our policy on the judgemental matters in relation to revenue performance, business model and strategy. engagement of the external auditors to recognition for major licence contracts with customers. Principal activities of the Committee supply non-audit services and assessing during 2013: their nature, extent and cost effectiveness. Consideration of the judgements assessing the external auditors’ surrounding the goodwill impairment in conjunction with management and the review performed in the fourth quarter Risk Review Committee, the Committee independence and objectivity, the effectiveness of the audit process and fees. of 2013. In light of the strong performance undertook an in-depth review of the of the Physical IP Division business in Group’s risk assessment and reporting undertaking an assessment of the the year and a robust order backlog, framework, with assistance and guidance effectiveness of the Committee (which the Committee was comfortable with from external advisers. This work has took place early in 2014 and concluded management’s assessment that no resulted in the development of a new that its performance was effective). reasonable variation in key assumptions format for the Corporate Risk Register, would affect the conclusion that no  Risk Assurance Matrix and Risk Heatmap. monitoring the integrity of the financial impairment in carrying value was required. These documents are expected to continue statements of the Group and any formal In reaching this conclusion, the Committee to evolve during 2014, with feedback from announcements relating to the Group’s considered the detailed work and sensitivity the Board being provided through the financial performance and reviewing any analyses presented by the external auditors. ongoing risk appetite discussions. significant financial reporting judgements and the clarity of disclosures. In connection with the Group’s participation reviewing a detailed response from in a consortium of technology companies  management to the questions raised by reviewing the effectiveness of the Group’s that acquired rights to MIPS Technologies the Conduct Committee of the Financial internal controls over financial reporting. Inc’s portfolio of patents in February Reporting Council on the Annual Report providing oversight of the Group’s risk 2013, consideration of the impairment for the year ended 31 December 2012. management framework and process. of the value of $100.5 million, which was The Group’s response was accepted with classified as an available-for-sale (AFS) no further questions being raised. We have making recommendations to the Board in financial asset. In Q4 2013, the trust made included certain additional disclosures relation to the appointment, remuneration a strategic decision not to pursue a licensing relating to goodwill impairment testing in and resignation or dismissal of the Group’s programme, which resulted in a decision this Annual Report. external auditors. that the asset had been impaired, giving rise to a non-cash exceptional charge of reviewing the work and results of Business considering compliance with legal £59.5 million. The Committee reviewed Assurance and Internal Audit in relation requirements, accounting standards, the the situation in detail and concurred with to the 2013 Audit Plan and approving the Listing Rules of the Financial Conduct management’s view that this impairment Audit Plan for the 2014 year. Authority and the requirements of the SEC. was necessary. More details are contained reviewing the 2013 external audit monitoring the assessment of going in note 6 on page 85. plans and reports, including those of concern, in advance of its consideration Consideration of management’s overseas subsidiaries. by the Board. judgement of the level of provision required to be carried in relation to ongoing litigation involving either the Group or its licensees, and in particular where the Group may be required to indemnify its licensees, including receiving regular updates from the Group’s General Counsel. 15 ARM Holdings plc Governance and Financial Report 2013

audit Committee continued

Consideration of the key judgements In addition to the private meetings held with of the audit partner, the Committee is satisfied made in estimating the Group’s tax charge the external auditors and the Committee, that the auditors’ procedures are sufficient to and review of any tax provisions in respect the Chairman of the Committee meets maintain their independence and objectivity. of open areas, together with assessment with the PwC team on a regular basis The Committee has also considered the level from independent experts. to provide the opportunity for an open of non-audit fees and believes that these are communication regarding any concerns, at a level which does not compromise their Consideration of the Group’s tax strategy as well as to understand their assessment of objectivity or independence in any way. and key developments that may influence key judgements as they arise. the Group’s global tax position. There are no contractual obligations Auditor effectiveness and restricting the Group’s choice of external Internal Audit partner rotation auditor. The Committee also keeps under review the value for money of the audit. The Committee noted further improvements PricewaterhouseCoopers LLP have been the in the development and effectiveness of the Group’s auditors since it listed on the London Policy on auditors providing Business Assurance/Internal Audit function Stock Exchange in April 1998. The external non‑audit services in 2013. In particular, the Audit Assurance auditors are required to rotate the audit partner responsible for the Group and To avoid the possibility of the auditors’ System (AAS) deployed during 2012 to objectivity and independence being provide improved document control, risk subsidiary audits every fifth year-end. The last audit partner rotation took place early in 2012. compromised, there is an agreed policy in assessment and reporting, was reviewed place on the provision of non-audit services in 2013. Further improvements to the The Committee considers that the relationship with the auditors is working well and remains by the auditors, which sets out arrangements AAS are underway and are expected to for approving: be completed in 2014. We reviewed the satisfied with their objectivity and effectiveness. resources of the team and the plans for This view is supported by a review of the services that require general pre-approval their deployment during the year. We also effectiveness of the external audit process, by the Committee; noted the key relationships between the which was undertaken early in 2014 with services that require specific pre- Assurance team and the Compliance and Board members and senior managers who Risk Review functions, as well as the working approval by the Committee before interact with the auditors. It looked at the work commences; relationship with the external auditors robustness of the audit, and the quality of PricewaterhouseCoopers LLP (PwC) and delivery, people and service, and concluded services that cannot be provided by Lloyd’s Register Quality Assurance. that the auditors are effective. Accordingly, the auditors. As well as the Committee’s formal meeting the Committee has not considered it with the VP Business Assurance/Internal necessary to date to require the firm to This non-audit services policy is reviewed Audit, the Chairman of the Committee meets tender for the audit work. This situation will annually. The Group’s tax advisory work him informally throughout the year in order to be kept under regular review. The Committee is carried out by the auditors only in cases provide the opportunity for open and timely is actively monitoring the developments where they are deemed to be best suited dialogue. Typically we discuss the content and and ongoing discussions in this area at the to perform the work in a cost-effective quality of papers intended for the Committee, Financial Reporting Council, the EU and the manner, given their familiarity with the emerging business risks, the quality of Competition Commission. Group’s business. In other cases, the Group engagement with IA and any concerns therein. has engaged another independent firm of Auditor independence accountants to perform tax advisory work. Audit plan and Approach The auditors are required to and do The Group does not normally award general During the year we reviewed PwC’s audit communicate with the Committee at least consulting work to the auditors. From time strategy, and the audit approach, key areas annually as to whether there are any threats to time, however, the Group will engage of focus and audit plan produced as a result. to their independence and objectivity and, the auditors to perform work on matters PwC explained their risk-based approach, if there are, what safeguards have been relating to benchmarking of the internal audit including the interaction with their work on applied. The Committee has also reviewed function, human resources, and royalty audits. internal control for the purposes of expressing the auditors’ Transparency report, paying A breakdown of fees paid to the auditors can an opinion under section 404 of the Sarbanes- particular attention to the sections covering be found in note 5 to the financial statements. Oxley Act. The results of those procedures internal controls, independence policies and the results of external regulator reviews. were reported in January and February Kathleen O’Donovan Having reviewed the safeguards in place, and 2014. No material misstatements remained Committee Chairman unadjusted in the financial statements. the contents of the Transparency report, as well as noting the regular and recent rotation 5 March 2014

16 Governance Financial Report

Nomination Committee

Sir John Buchanan Nomination Committee Chairman (until 1 March 2014)

“The Committee’s key task in 2013 was the selection of a As announced on 27 January 2014 it is with much regret that I stepped down as Chairman new Chief Executive Officer, which resulted in the promotion on 1 March 2014, and will be retiring from the of Simon Segars to the role on 1 July 2013. This followed Board at the AGM on 1 May 2014 due to a medical condition. The Committee, led for this an extensive externally conducted review of candidates purpose by the Senior Independent Director, worldwide, and Simon’s proven technology expertise and was active in 2013 and early 2014 in finalising management skills across a range of senior executive roles arrangements for the appointment of a new Chairman and we were delighted to welcome resulted in him being selected. The Committee also identified Stuart Chambers who joined the Group on and appointed Eric Meurice, who has significant experience 27 January 2014 as Chairman Designate and in the semiconductor industry, to the Board on 1 July 2013 took over as Chairman on 1 March 2014. as an additional independent non-executive director. Again, The Committee, now chaired by Stuart Chambers, continues to focus on defining this appointment followed an extensive externally conducted the skills and attributes required for future review of candidates.” non-executive director appointments to ensure that the Board comprises individuals with the requisite skills, knowledge and experience to ensure that it is effective in discharging its duties.

17 ARM Holdings plc Governance and Financial Report 2013

Nomination Committee continued

Nomination Committee composition and meeting attendance during 2013

Name of director Position Meetings attended Sir John Buchanan Chairman 3/3 Kathleen O’Donovan Senior Independent Director 4/4 Philip Rowley Independent non-executive director 4/4 Andy Green Independent non-executive director (appointed 21 February 2013) 3/3

During the year, the activities of the Andy Green joined the Committee in February Committee included engaging external search 2013. His business and skills background firms to seek and introduce candidates and contributed valuable experience to our work. interviewing a number of candidates in each case for the following roles: In addition to leading the process for Board appointments and making recommendations to Chief Executive Officer (CEO), which the Board in relation to new appointments, the resulted in the Committee recommending Committee’s general responsibilities include: the appointment of Simon Segars. reviewing succession planning, Board Chairman, which resulted in the composition and balance; Committee recommending the appointment of Stuart Chambers. considering the roles and capabilities required for each new appointment, based Independent non-executive director, which on an evaluation of the skill, experience, resulted in the Committee recommending independence and knowledge of the the appointment of Eric Meurice. existing directors.

The Chairman led the process for the The Nomination Committee is seeking appointment of the new CEO and the further candidates as independent non- new independent non-executive director. executive directors with appropriate skills, Kathleen O’Donovan, in her capacity as experience and diversity to complement the Senior Independent Director, led the our existing Board members and maintain, process for the appointment of the new collectively, an effective Board. We will also Chairman, chairing relevant meetings of be looking for financial expertise, in light of the Nomination Committee and a number the forthcoming retirement of Philip Rowley of conference calls between Committee in May 2014, following his nine years’ service members. The recruitment process involved on the Board. a review by the Board of all aspects of the role of Chairman, its requirements, Sir John Buchanan Board dynamics and how best the new Chairman (until 1 March 2014) Chairman should interact with the Board, the Executive Committee, shareholders and 5 March 2014 other stakeholders. The external search firms were Zygos in the case of the Chairman recruitment and Egon Zehnder in relation to the CEO and non- executive director recruitments. There is no connection between the Group, any individual director, nor either of the search firms.

18 Governance Financial Report

Corporate governance report

Internal control/risk management the effective and efficient operation of The Board has reviewed and approved the The Group fully complies with the UK the Group and its divisions by enabling system of internal control, including internal Corporate Governance Code (September management to respond appropriately to controls over the consolidation process 2012)’s provisions on internal control, having significant risks to achieving the Group’s and financial reporting, which have been in established procedures to implement in full business objectives; place for the year under review and up to the Turnbull Guidance “Internal Control: the date of approval of the Annual Report Revised Guidance for Directors on the the safeguarding of assets from and financial statements. These controls Combined Code”. The Group’s risks are inappropriate use or from loss and fraud, consist of extensive reviews by qualified and managed within a systematic process of risk and ensuring that liabilities are identified experienced individuals, underpinned by a identification and assessment. The detailed and managed; system of checklists which ensures that all elements of the financial statements and risk management process is explained in the the quality of internal and appropriate disclosures are considered and Risk management and principal risks section external reporting; on pages 47 to 49 of the Strategic Report. accurately stated. compliance with applicable laws and Control systems are designed to manage The Audit Committee is responsible for regulations and with internal policies on the rather than eliminate the risks inherent in a ensuring that the risk management framework conduct of the Group’s business; and and process is operating effectively. The Risk fast-moving, high-technology business and Review Committee reviews the Corporate the ability to recover in a timely manner can, therefore, provide only reasonable Risk Register (CRR), Risk Assurance Matrix from the effects of disasters or major and not absolute assurance against material (RAM), and risk heatmap on a quarterly basis, accidents that originate outside the misstatement or loss. Group’s direct control. and minutes of its meetings are reviewed Remuneration Committee by the Audit Committee. The Executive Committee and the Board also review Compliance with section 404 of the A description of the composition, these documents at least twice each year. Sarbanes-Oxley Act 2002 (US) has been responsibilities and operation of the The Board confirms that the necessary actions successfully achieved for each financial year Remuneration Committee is set out in the have been or are being taken to remedy any since it became effective for foreign private Remuneration report. issuers in 2006. This is reported on in more significant failings or weaknesses identified The Group has a number of other detail in the annual report on Form 20-F from this process in a timely manner. Committees and bodies that contribute to the that is filed with the SEC. The processes and overall control environment. These include: The Board has overall responsibility for procedures for identifying, evaluating and ensuring that the Group maintains an managing the significant business, operational, Risk Review Committee adequate system of internal control and financial, compliance and other risks facing The Risk Review Committee comprises the risk management, and for reviewing its the Group have been successfully integrated Chief Technology Officer, the Chief Financial effectiveness, while implementation of into day-to-day business operations through Officer, the Chief Operating Officer, the internal control systems is the responsibility our internal control system. This is known as VP Finance, ARM Group, the VP Business of management. The Group has implemented the ARM Management System (AMS) and is Assurance/Head of Internal Audit and the an internal control system designed to proven to provide a sustainable solution for Company Secretary. The Group’s process help ensure: ongoing compliance. for the identification, ownership, mitigation The AMS, which covers financial, compliance and reporting of risk was enhanced further and operational controls, is fully documented during 2013. The Committee established and compliance is monitored through a CRR some years ago, which summarises periodic controls testing during each year. the key risks faced by the Group and sets The effectiveness of individual controls is out risk management activities, the sources also reviewed with their owners within the of assurance and action plans to mitigate divisions and functions to ensure efficacy and any significant residual risk. Residual risks are relevance. The Business Assurance function assessed in terms of likelihood and impact reports on the status of the AMS to the and mapped onto the RAM. Each risk on Audit Committee at least twice each year. the CRR is owned by a member of the The Compliance and Audit Committees senior management team. Risk management also monitor the satisfactory remediation action plans are managed within the relevant of any identified control issues with Group- operational plans of the divisions and level significance. corporate functions.

19 ARM Holdings plc Governance and Financial Report 2013

Corporate governance report continued

During 2013, the Committee, in conjunction The Committee reports formally on the Business Review Meeting chaired by the Chief with management, undertook an in-depth CRR to the Executive Committee twice Operating Officer, the purpose of which review of our risk assessment and reporting a year, where its findings are considered is to monitor and control all main business framework, with assistance and guidance from and challenged. activities, revenue forecasts and other matters external advisers. The work has resulted in requiring approval. Through this structure the development of a new format for the More information on industry trends and management reviews (with representatives CRR, RAM and risk heatmap with a better associated risks and opportunities are from the divisions and functions) revenues, focus on strategic risks. These documents are included in the Risk management and principal orders booked, costs, product and project expected to continue to evolve during 2014 risks section of the Strategic Report on pages delivery dates, and levels of defects found in with feedback from the Board being provided 47 to 49 and in the annual report on Form products in development. Relevant issues are through our ongoing risk appetite discussions. 20-F for the year ended 31 December 2013 escalated to the Executive Committee which, which is available on the Group’s website at in turn, raises relevant issues to the Board of The CRR and risk heatmap are normally www.arm.com. the Group. considered in detail by the Board in January each year and, at the January 2014 review, the Compliance Committee The seven Governance Review Teams and Board confirmed that the level of residual risk The Compliance Committee consists of three Operational Review meetings all report is regarded as acceptable and within normal the General Counsel, the Chief Operating to the Operations Committee, which in turn parameters for a company operating in ARM’s Officer, the Chief Financial Officer, the EVP, reports to the Executive Committee. sphere of business. Risk appetite and a draft People, the VP Business Assurance/Head Internal audit function set of guiding principles were also discussed of Internal Audit, the Chief Information The Group has an internal audit function that by the Board in January 2014. It was agreed Officer, the VP Operations and the Company meets the criteria set out in the key practice that the draft guiding principles are a good Secretary. It oversees compliance throughout standards prescribed by the Institute of starting point to inform and serve as a context the business with all relevant international Internal Auditors. The internal audit function for the development and implementation of regulations, export controls, trading undertook a range of financial and operational the Group’s strategy. The guiding principles requirements and standards; including direct audits in line with the plan agreed with the will continue to be refined during 2014. oversight of financial, employment, health and safety, environmental, business continuity and Audit Committee. Additional resource The Risk Review Committee reports to security processes and policies. was provided by co-sourcing arrangements the Audit Committee throughout the in 2013 and this will continue in 2014. year. The Board and the Audit Committee Disclosure Committee The Group successfully achieved certificate receive copies of the minutes of Risk Review The Disclosure Committee comprises the renewal for ISO 9001 in December 2013. Committee meetings, the CRR and the risk Chief Executive Officer, the Chief Financial The Group also has certification for heatmap. These provide greater visibility of Officer, the VP Finance, ARM Group, the ISO 27001, the international standard for the range of risks, the ways in which such risks General Counsel, the VP Investor Relations Information Security Management and for are mitigated, and an assessment of the level and the Company Secretary. It is responsible ISO 22301, the international standard for and acceptability of residual risk. It is intended for ensuring that disclosures made by the Business Continuity Management, both of that the Board will review changes to the CRR Group to its shareholders and the investment which were maintained throughout the year. and risk heatmap quarterly during 2014. community are accurate, complete and fairly present the Group’s financial condition in all The Group’s Management System documents The Risk Review Committee typically meets material respects. processes and responsibilities across all on a quarterly basis to review the CRR business functions and operations. As an and identify other risks that need to be Management structure autonomous part of this system, the internal incorporated. Each risk owner is required In addition, there are various Committees, audit function carries out a programme of to review and demonstrate that residual Governance Review Teams and Operational audits to assess its effectiveness and efficiency, risks are being appropriately mitigated via Review meetings that span the Group, as resulting in continuous maintenance and the operational plans. The divisions’ and shown in the management structure chart on improvement of the system, adapting to corporate functions’ operational plans are page 13. These include the regular Executive changes in business operations as necessary. updated quarterly. Changes that could impact Committee meetings chaired by the Chief the CRR are reviewed by the Committee. Executive Officer and the weekly

20 Governance Financial Report

To demonstrate compliance with the Anti-bribery and anti-corruption The Group strives for equal opportunities for Sarbanes-Oxley Act, the internal audit measures all its employees and does not tolerate any function also maintains the documented The Group’s Code of Business Conduct harassment of, or discrimination against, its controls over financial reporting and confirms and Ethics, which is available on the Group’s staff. The Group endeavours to be honest the operation of them either by direct testing website, and the Company Rules incorporate and fair in its relationships with its customers or through a monitored self assessment appropriate provisions to meet our and suppliers and to be a good corporate programme. The management system obligations under the UK Bribery Act 2010. citizen, respecting the laws of the countries in is audited externally by Lloyd’s Register A training and communication programme is which it operates. Quality Assurance for compliance with in place to ensure that employees understand University Programme the requirements of ISO 9001:2008, ISO the requirements of the Act and the reporting 27001:2005, ISO 22301:2012 and as part of procedures. This is targeted at employees The ARM University Programme (AUP) its Business Assurance scheme supports the in roles or working in countries that are is an important initiative for the future Sarbanes-Oxley compliance activity. regarded as higher risk. of the Group and our relationships with business Partners. The programme engages Any significant control failings identified Arrangements with contractors and suppliers with professors, researchers and students through the internal audit function or the have been and will continue to be reviewed worldwide using various channels, including external auditors are brought to the attention and updated to reflect the requirements higher education institutions, government of the Compliance Committee and undergo of the Act. The Compliance Committee agencies and ARM’s business Partners. a detailed process of evaluation of both oversees the reporting procedures and the failing and the steps taken to remedy it. monitors and escalates reports in appropriate The aim of the AUP is to develop the There is then a process for communication circumstances. There were no reports of next generation of engineers for the ARM of any significant control failures to the Audit concern during 2013 or up to 3 March 2014, ecosystem, and 2013 saw the building of firm Committee. There were no significant control being the latest practicable date before the foundations to achieve this aim. A strategy failures during 2013 or up to 3 March 2014, printing of this report. and plan have been put in place to increase being the latest practicable date before the the reach of the Group and its Partners printing of this report. Human rights and equal opportunities into academia worldwide and to scale up The Group has signed the Universal AUP operations using strategic partnerships, Whistleblowing procedures Declaration of Human Rights and has streamlined processes and procedures. The Group operates a whistleblowing policy integrated relevant human rights principles These include the AUP flagship Lab-in-a- for employees to report concerns about into its policies for employees and contractors. Box (LiB) product which is now shipping. any unethical business practices to senior There is growing interest worldwide in the This allows educators to use state-of-the-art management in strict confidence and without issue of the impact of business on human ARM and ARM Partners’ technologies in their fear of recrimination. If they prefer, they can rights. Reflecting this, during 2013 the Group courses and laboratories. LiB, which is free of do so anonymously through an independent worked with Shift, a specialist NGO working charge, includes both hardware and software third-party telephone line. The third-party on business and human rights, to understand and comprehensive teaching materials. telephone line is tested regularly to ensure more about this agenda and its key guidelines, that employees can use it if they have 2013 saw the AUP sign up seven Partners: the UN Guiding Framework on Business and Freescale, ST, NXP, Nuvoton, Cypress, occasion to. The Audit Committee receives Human Rights. details of any such confidential reports from EnergyMicro/SiLabs and Xilinx for joint the Compliance Committee. There were no As a result of our work with Shift, we are university engagements and LiB hardware whistleblowing reports in 2013. In 2014, there confident that our risk in this area is low. platforms. In this time the AUP also doubled has been one whistleblowing report, which is We have adopted a specific Human Rights its reach to universities as a result of the currently under investigation. Policy within our Code of Business Conduct above activities, with particularly high growth and Ethics, in addition to our existing in AsiaPAC and India. Further partnerships in policies on conflict minerals, business ethics, education and research are being explored in discrimination and export controls. This new 2014 to enable the AUP to increase its reach policy underlines our commitment to trying and scalability. to avoid any adverse impact on human rights The Group and our Partners are seeing the in the way we conduct our operations, and benefits of the AUP, as students graduate designates contact points within the senior with experience in designing with ARM executive team for any employee to seek products and as university engineering advice on any issue that might have human departments base their own research around rights implications. ARM technology.

21 ARM Holdings plc Governance and Financial Report 2013

Corporate governance report continued

Environmental, social, corporate The Group’s ongoing environmental impact being developed with these partners and governance and ethical policies analysis informs management about key will be extended to other key sites and new While the Group is accountable to its environmental factors and how it can reduce build projects. The Group continued to shareholders, it also endeavours to take into the impacts associated with them. In 2013 enhance its environmental data collection and account the interests of all its stakeholders, the Group’s advanced compute resource reporting ability during 2013 to support the including employees, customers and suppliers requirement continued to build upon the work of our Energy Use and Climate Change and the local communities and environments success of its CEEDA Gold (Certified Energy Committee (EUCCC). This is an Executive- in which it operates. The Chief Executive Efficient Data Centre Award) winning data sponsored steering group that directs activity Officer and the Chief Financial Officer take centre in Cambridge by commissioning the relating to environmental stewardship and the responsibility for these matters, which are design and build of a second major data management of our environmental aspects. considered at Board level. centre hub in Austin, Texas. This installation has the potential to harness geothermal The Group’s environmental policy is published Full details of our CR strategy and energy as part of its design and therefore on our website within the CR report. In line achievements can be found in the main could have a Power Usage Effectiveness (PUE) with the Companies Act 2006, the articles CR report on our website (www.arm/ rating some 25% lower than typical data of association enable the Group to send reporting2013) and a summary of highlights centres in this region. We have piloted new information to shareholders electronically from the year are included in the Sustainability build techniques for this project as part of a and make documents available through the section of the Strategic Report on page 44. programme to ensure minimal environmental website rather than in hard copy, which impact in our data centre strategy. provides both environmental and cost The Group regularly monitors employees’ benefits. Shareholders can opt to continue awareness of Group policies and procedures, In 2013 ARM opened a new 120,000 receiving a printed copy of the annual report, including its conduct and ethical policies. sq ft office in Bangalore, which attained subject to availability. Employees and temporary contractors Leadership in Energy and Environmental reconfirm their understanding of key policies Design (LEED) Gold Accreditation. Health and safety each year to help reinforce awareness. This accreditation recognises buildings for The Group operates in an industry and in high environmental performance in their environments which are considered low The Group operates from a global construction and operation. ARM aims to risk from a health and safety perspective. portfolio of offices located in 15 countries. meet the same LEED accreditation or the However, the safety and welfare of The portfolio is made up entirely of offices equivalent Building Research Establishment employees, contractors and visitors is a since the Group has no manufacturing Environmental Assessment Methodology priority in all Group workplaces worldwide. activities. As such there are no hazardous (BREEAM) performance in all new office The Group continues to improve its substances nor complex waste streams to be construction as demonstrated in the design management systems in this area with an audit managed as part of our business operations. briefs of other office expansions developed programme that includes external auditing of The Group’s principal activity involves the during 2013. These building standards ensure processes and offices. use of IT-based engineering tools to create high environmental performance of the intellectual property. With the exception of More detail about the Group’s approach to Group’s built environment throughout its development systems products, the majority environmental matters and health and safety is entire lifecycle. of “products” sold by the Group comprise included in the CR report. microprocessor core and physical IP designs The Group has continued to partner with Business model that are delivered electronically to customers. companies working in the low-impact building technology field. We have test installations A detailed description of ARM’s business in place with Intellisense, Enlight and Alert model is set out on pages 16 to 17 of the Me in our Cambridge offices to improve Strategic Report. environmental performance using energy- By order of the Board efficient ARM technology. Areas such as lighting control and environmental monitoring of plant for improved building efficiency are Patricia Alsop Company Secretary

22 Governance Financial Report

Directors’ report Additional statutory information The directors present their report and the audited financial statements of the Group for the year ended 31 December 2013. The following additional disclosures are made in compliance with the Companies Act 2006, the Disclosure and Transparency Rules and the UK Corporate Governance Code (September 2012).

Description of operations, principal Future developments supported by a sensitivity analysis and stress activities and review of business The Group’s stated objective is to establish tests undertaken at the year end which The principal operations and activities of the a global standard for its RISC architecture, showed that some extreme assumptions Group and its subsidiaries are the licensing, physical IP and other products in the would have to be made before there is a marketing, research and development of embedded microprocessor and semiconductor negative impact. RISC‑based microprocessors, fabric system IP, markets. The directors believe that, in order to Dividends graphics processors, physical IP and associated achieve this goal, it is important to expand the systems IP, software and tools. The nature number and range of potential customers for The directors recommend payment of of the global semiconductor industry is such its technology. a final dividend in respect of the year to that most of the Group’s business originates 31 December 2013 of 3.6 pence per share overseas and, to serve its customers better, The Group intends to enter into licence which, subject to approval at the AGM on the Group has sales offices around the world. agreements with new customers and to 1 May 2014, will be paid on 16 May 2014 These include eight offices in the US and increase the range of new technology to shareholders on the register on 22 April offices in Shanghai, Shenzhen and Beijing, PR supplied to existing customers. 2014. This final dividend, combined with the China; Shin-Yokohama, Japan; Seoul, South Relationships will continue to be established interim dividend of 2.1 pence per share paid in Korea; Taipei, Taiwan; Kfar Saba, Israel; Paris, with third-party tools and software vendors October 2013, makes a total of 5.7 pence per France; Grasbrunn, Germany and Bangalore, to ensure that their products will operate share for the year, an increase of 27% on the India. Design offices are based in Cambridge, with the Group’s products. As a result of its total dividend of 4.5 pence per share for 2012. Sheffield and Blackburn, UK; Sophia Antipolis position in the semiconductor industry, the The total cost of dividends paid or to be paid and Grenoble, France; Grasbrunn, Germany; Group is presented with many opportunities in respect of the year to 31 December 2013 Trondheim, Norway; Sentjernej, Slovenia; to acquire complementary technology or is approximately £80 million. resources and it intends to continue to make Lund, Sweden; Oulu, Finland; Austin, Texas; Share buyback programme Olympia, Washington and San Jose, California appropriate investments and acquisitions from No share buybacks were undertaken in 2013 in the US; Shanghai, PR China; Hsinchu, time to time. and no shares have been re-purchased to Taiwan and Bangalore, India. Going concern date in 2014. The rolling authority to buy back More information about the business, its After dividend payments of £68.9 million the shares given by the shareholders at the AGM operations and key performance indicators highly cash generative nature of the business in May 2013 remains in place and a resolution is set out in Overview Marketplace sections enabled the Group to increase its cash, cash to authorise the directors to make purchases on pages 14 to 15, the Financial review equivalents and deposits to £706.3 million in appropriate circumstances will be proposed incorporating a section on Risk management (net of accrued interest of £7.2 million) at the 2014 AGM. In addition to our policy of on pages 47 to 57, and the Sustainability at the end of 2013. This was an increase increasing the dividend through the economic summary on pages 44 to 46. The Group’s from £520.2 million (net of accrued interest cycles, the Group intends to commence a statement on corporate governance can be of £7.4 million) at the start of the year. limited share buyback programme in 2014 found in the Corporate governance report After reviewing the 2014 budget and longer- in order to maintain the issued share capital on pages 6 to 22 of this Governance and term plans and considering any reasonably at a constant level in future. The issued Financial Report. The Risk management likely scenarios that may occur, the directors share capital at 31 December 2013 was section of the Financial review and the are satisfied that, at the time of approving 1,400,263,804 shares, broadly the same level Corporate governance report form part of the financial statements, it is appropriate to as in July 2005 when the Board initiated the this section and are incorporated into it by adopt the going concern basis in preparing ongoing share buyback programme under cross reference. the financial statements of both the Group which purchases were made until the end and the parent Company. This view was of 2008.

23 ARM Holdings plc Governance and Financial Report 2013

directors’ report continued

Research and development (R&D) Donations Global Green House Gas Emissions Development of IP is at the heart of the During the year the Group made donations Methodology Group’s activities and 69% of the Group’s for charitable purposes as follows: Our report covers emissions within workforce is employed in engineering operations that fall under the Group’s financial activities. Within this, R&D is of major 2013 2012 £000 £000 control. As such data used represents our importance and, as part of its research global operations with regional conversion Promotion of education 362.3 142.0 activities, the Group collaborates closely factors applied as required. with universities worldwide and plans to Relief of poverty 55.2 55.3 continue its successful engagement with Other 50.3 37.3 Our emission factors are from Defra/DECC Michigan University. GHG Conversion Factors for Company Medical research 62.4 26.5 reporting. Our environmental impact Key areas of product development for 2014 Local charities 67.8 14.0 assessment of ARM’s operations includes include the development of further energy- Environmental 89.9 1.7 energy use and air travel as our material efficient, high-performance processors, such CO e contributors. We have excluded non Total 687.9 276.8 2 as ARM cores based on symmetric multicore material emissions related to refrigerant losses and superscalar technology. in air conditioning systems, motor cars and ARM’s investment of £2.5 million in an waste streams. The Group is investing in future physical IP interest-free charitable bond in Future development including system IP and software Business, made in 2010, remains in place. Further detail on our emissions and the and low-power, low-leakage technologies for Future Business is a Cambridge-based social Group’s management of those emissions a range of chip manufacturing processes, to enterprise, which provides business advice, can be found in our Carbon Disclosure ensure leadership in this market. In addition, coaching and affordable workspace to Project Submissions. the Group will continue to develop and entrepreneurs, start-up businesses, charities deliver tools, graphics processors and system and voluntary organisations. Reported Emissions 2013 2012 IP to enable its customers to design and Scope 1 and 2 Emissions ARM employees are encouraged to offer programme SoCs. Combustion of Fuel, Operation their time and expertise to help charities and of Facilities and Electricity The Group incurred R&D expenses of other groups in need. The Group operates and Cooling Purchased £202.9 million in 2013, representing 28% of a Matching Gift Donation programme (tonnes CO2e) 11,067 10,547 revenues, compared with £166.3 million in for individual employees’ fundraising CO2e Intensity (Tonnes CO2e 2012, representing 29% of revenues. R&D efforts. The Group does not make any per Employee) 3.37 3.82 expenses have been charged in full to the political donations. income statement since the requirements for Scope 3 Emissions capitalisation were not met. The requirements More details of the Group’s charitable work Business Travel (Tonnes CO2e) 10,186 10,112 for capitalisation are considered in more detail and fundraising activities can be found in the in note 1 to the financial statements. Corporate Responsibility report available on the Group’s website at www.arm.com/ reporting2013.

24 Governance Financial Report

Directors in the year Re-election of directors Share capital The following served as directors of As previously announced, Sir John Buchanan At 31 December 2013, ARM’s share the Company during the year ended stepped down as Chairman on 1 March capital comprised a single class of ordinary 31 December 2013: 2014 and will retire from the Board at the shares of 0.05 pence each and there were conclusion of the AGM on 1 May 2014. 1,400,263,804 ordinary shares in issue, none Sir John Buchanan (Chairman) Stuart Chambers joined the Board on of which were held in treasury (2012: no Simon Segars (Chief Executive Officer) 27 January 2014 as Chairman designate shares held in treasury). The rights attached and became Chairman on 1 March 2014. to treasury shares are restricted in accordance Tim Score (Chief Financial Officer) He will be standing for election at the 2014 with the Companies Act. AGM. With the exception of Philip Rowley, Mike Muller (Chief Technology Officer) who is retiring having served for nine years, The rights attached to ordinary shares are as follows: Andy Green (independent non- and Sir John Buchanan, all of the other executive director) directors will be standing for re-election at 1. On a show of hands at a general meeting, the 2014 AGM. In line with the provisions every shareholder present in person (or, Larry Hirst CBE (independent non- of the UK Corporate Governance Code in the case of a corporation, present at the executive director) 2010, all directors will present themselves meeting by way of a representative) and for re-election annually (if eligible) unless entitled to vote shall have one vote and Eric Meurice (independent non-executive the directors have agreed otherwise. director – appointed 1 July 2013) every proxy present who has been duly See pages 4 to 5 for the biographies of the appointed by a shareholder entitled to Kathleen O’Donovan (Senior Independent directors at the date of this report. vote on the resolution shall have one vote. Director and financial expert) The interests of the directors in the 2. On a poll, every shareholder present in Janice Roberts (independent non- Company’s ordinary shares of 0.05 pence, person (or in the case of a corporation, executive director) all of which were beneficially held, are present at the meeting by way of a representative) or by proxy and entitled Philip Rowley (independent non-executive disclosed in the Remuneration report. to vote shall have one vote for every director and financial expert) The directors have the benefit of directors’ ordinary share held. Warren East (former Chief Executive Officer and officers’ liability insurance. 3. Shareholders are entitled to a dividend – retired 30 June 2013) Appointment of directors where declared or paid out of profits Mike Inglis (former Chief Commercial Officer ARM shareholders may by ordinary resolution available for such purposes. – retired 31 March 2013) appoint any person to be a director. ARM 4. Shareholders are entitled to participate in must have not less than two and no more a return of capital on a winding-up. than 16 directors holding office at all times. ARM may by ordinary resolution from time to time vary the minimum and/or maximum number of directors. The directors may appoint a director to fill a casual vacancy or as an additional director to hold office until the next AGM, who shall then be eligible for election.

25 ARM Holdings plc Governance and Financial Report 2013

directors’ report continued

The notice of the AGM specifies deadlines for Substantial shareholdings exercising voting rights and appointing a proxy The directors are aware of the following or proxies to vote in relation to resolutions substantial interests in the issued share capital to be passed at the AGM. All proxy votes of the Company as at 3 March 2014: are counted and the numbers for, against or withheld in relation to each resolution are Percentage of issued announced at the AGM and published on ordinary share capital ARM’s website after the meeting. Baillie Gifford & Co 5.05 There are no restrictions on the transfer of Thornburg Investment Management 5.01 ordinary shares in ARM other than: Fidelity Management and Research Corporation 4.92 The Capital Group Companies, Inc 4.16 restrictions that may from time to time be imposed by laws and regulations (for Janus Capital Management LLC 3.05 example, those relating to market abuse and insider dealing); Save for the above, the Company has not been notified, as at 3 March 2014, of any restrictions that may be imposed pursuant material interest of 3% or more or any non- to the Listing Rules of the Financial Services material interest exceeding 10% of the issued Authority under which certain employees share capital of the Company. of ARM require the approval of the Company to deal in shares; Articles of association ARM’s articles of association may be amended restrictions on the transfer of shares that only by a special resolution at a general meeting may be imposed under article 61.2 of of shareholders. It is proposed that the articles ARM’s articles of association or under of association be amended at the AGM on Part 22 of the Companies Act 2006, in 1 May 2014 to increase the aggregate limit either case following a failure to supply on ordinary remuneration payable to the information required to be disclosed non-executive directors from £0.5m to £1m. following service of a request under This aggregate limit has not been increased section 793 of the Companies Act 2006; since 2007. Further details are contained in the restrictions on transfer of shares held Circular and Notice of 2014 AGM. under certain of the Company’s employee share plans while they remain subject to the plan.

26 Governance Financial Report

Directors’ authority emptive offer up to an aggregate nominal able to continue in their current role. amount of £35,222, or (iii) in connection The directors are responsible for the Employee involvement management of the business of ARM and with a rights issue up to a further nominal may exercise all powers of ARM subject to amount of £35,222, in each case as if To help reach the best decision, and one applicable legislation and regulation and the section 561(1) of the Companies Act 2006 that the whole company can support, it articles of association. did not apply to such allotment (or sale). is important that we include the views of The period of authorisation will in each those outside of the management team in At the 2013 AGM, the directors were given case expire at the earlier of the conclusion the decision-making process. To this end, authority to buy back a maximum number of of the 2014 AGM or on 30 June 2014. internal conferences and communications 139,650,000 ordinary shares at a minimum meetings involving employees from all price of 0.05 pence each. The maximum price Qualifying indemnity provision parts of the Group in discussions on future was an amount equal to 105% of the average Article 139 of the Company’s articles of strategy and developments are held regularly. of the closing mid-market prices of ARM’s association provides for the indemnification Furthermore, employee share ownership ordinary shares as derived from the London of directors of the Company against liability is encouraged and all employees are able Stock Exchange Daily Official List for the five incurred by them in certain situations, and is to participate in one of the Group’s share business days immediately preceding the day a “qualifying indemnity provision” within the ownership schemes. The Group has an on which such ordinary shares are contracted meaning of section 236 of the Companies informal and delegated organisation structure. to be purchased. This authority will expire Act 2006. It does not presently operate any collective at the earlier of the conclusion of the 2014 agreements with any trade unions. AGM or 30 June 2014. The qualifying indemnity was in force during the financial year and up to the date of signing Information about the Group’s Accordingly, a resolution will be proposed as the annual report. employees and policies are contained a special resolution at the 2014 AGM to give in the Remuneration report, the “Our ARM authority to acquire up to 140,891,000 Change of control commitment” section and the Corporate ordinary shares following expiry of the All of ARM’s equity-based plans contain Governance report. Information about current authority. The directors will use this provisions relating to a change of control. environmental matters, social and community authority only after careful consideration, Outstanding awards and options would policies and their effectiveness is contained in taking into account market conditions normally vest and become exercisable on a the “Our commitment” section and in the full prevailing at the time, other investment change of control, subject to the satisfaction Corporate Responsibility report available on opportunities, appropriate gearing levels and of any performance conditions at that time. our website. the overall position of ARM. In particular, this authority will be exercised only if the There are no significant agreements to which Financial instruments directors believe that it is in the best interests ARM is a party that take effect, alter or The Group’s financial risk management and of shareholders generally and will increase terminate upon a change of control. policies and exposure to risks in relation to earnings per share. financial instruments are detailed in note 1c. Diversity Resolutions will also be proposed at the 2014 The Group is committed to employment AGM to: policies, which follow best practice, based on equal opportunities for all employees, authorise the directors generally to allot irrespective of sex, race, colour, disability up to £232,470 in nominal amount of or marital status. The Group has a strong ordinary shares; demand for highly qualified staff and disability is not seen to be an inhibitor authorise the directors to allot up to a to employment or career development. further £232,470 in nominal amount of Appropriate arrangements are made for the ordinary shares in connection with a rights continued employment and training, career issue (as defined in the Notice of AGM); development and promotion of disabled authorise the directors to allot ordinary persons employed by the Group. In the shares (or sell treasury shares) for cash (i) event of any staff becoming disabled while otherwise than in connection with a “pre- with the Group, their needs and abilities emptive offer” (as defined in the Notice of would be assessed and the Group would, AGM) up to an aggregate nominal amount where possible, seek to offer alternative of £35,222 or (ii) in connection with a pre- employment to them if they were no longer

27 ARM Holdings plc Governance and Financial Report 2013

directors’ report continued

Essential contracts by the European Union, and the parent the preparation and dissemination of financial There are no parties with whom the Group Company financial statements in accordance statements. Legislation in the UK governing has contractual or other arrangements that with United Kingdom Generally Accepted the preparation and dissemination of financial are essential to the business of the Group. Accounting Practice (United Kingdom statements may differ from legislation in Accounting Standards and applicable law). other jurisdictions. There is one company that accounted for Under company law the directors must 12% of Group revenues in 2013 (2012: 15%), not approve the financial statements unless Each of the directors, whose names and which is referred to in note 2 on page 80. they are satisfied that they give a true and functions are listed in the biographies on fair view of the state of affairs of the Group pages 4 to 5, confirm that to the best Annual General Meeting (AGM) and the Company, and of the profit or loss of their knowledge: The AGM will be held at 110 Fulbourn Road, of the Group for that period. In preparing Cambridge CB1 9NJ, UK, on 1 May 2014 the Group financial statements, which have these financial statements, the directors are been prepared in accordance with IFRSs at 2.00pm. A presentation will be made at required to: this meeting outlining recent developments as adopted by the EU, give a true and in the business. All voting at the meeting select suitable accounting policies and then fair view of the assets, liabilities, financial will be conducted on a poll where every apply them consistently; position and profit of the Group; shareholder present in person or by proxy this Directors’ report on pages 23 to will have one vote for each share of which make judgements and accounting estimates that are reasonable and prudent; 28 and the Financial review and the Risk they are the owner. The Group will convey management sections on pages 47 to 49 of the results of the poll on the website after state whether IFRSs as adopted by the Strategic Report include a fair review the AGM. Shareholders are invited to submit the European Union and applicable of the development and performance written questions in advance of the meeting. UK Accounting Standards have been of the business and the position of the Questions should be sent to The Company followed, subject to any material Group, together with a description of Secretary, ARM Holdings plc, 110 Fulbourn departures disclosed and explained in the principal risks and uncertainties that Road, Cambridge CB1 9NJ, UK. the Group and parent Company financial it faces. A resolution to reappoint statements respectively; Disclosure of information to auditors PricewaterhouseCoopers LLP as auditors prepare the financial statements on the In the case of each director in office at the to the Group will be proposed at the AGM. going concern basis unless it is inappropriate date the Directors’ report is approved, that: Details of other resolutions to be proposed to presume that the Company will continue at the meeting are set out in the Circular and in business. (a) so far as the director is aware, there is Notice of AGM 2014, which will be made no relevant audit information of which the available to all shareholders together with a The directors are responsible for keeping Company’s auditors are unaware; and proxy card. adequate accounting records that are sufficient to show and explain the Company’s (b) the director has taken all the steps that Statement of directors’ responsibilities transactions and disclose with reasonable he or she ought to have taken as a director The directors are responsible for preparing accuracy at any time the financial position in order to make themselves aware of any the Annual Report, the Remuneration report, of the Company and the Group and enable relevant audit information and to establish and the financial statements in accordance them to ensure that the financial statements that the Company’s auditors are aware of with applicable law and regulations. and the Remuneration report comply with that information. the Companies Act 2006 and, with regards Company law requires the directors to By order of the Board prepare financial statements for each financial to the Group financial statements, Article year. Under that law the directors have 4 of the IAS Regulation. They are also prepared the Group financial statements responsible for safeguarding the assets of Patricia Alsop in accordance with International Financial the Company and the Group and hence for Company Secretary Reporting Standards (IFRSs) as adopted taking reasonable steps for the prevention ARM Holdings plc and detection of fraud and other irregularities. Company Number: 2548782 The directors are responsible for the maintenance and integrity of the annual report included on the Group’s website in accordance with the UK legislation governing

28 Governance Financial Report

Directors’ Remuneration report

Philip Rowley Remuneration Committee Chairman (until 31 December 2013)

Dear Shareholder 2013 was a busy year for the Committee with the introduction and implementation of the new Long-Term Incentive Plan (LTIP), which also involved making changes to the annual bonus plan for the purposes of simplification of the overall package. This followed consultation with major shareholders and representative bodies which started in 2012. The Committee also approved new salary and benefits arrangements for Simon Segars on his promotion to Chief Executive Officer. In line with ARM’s long-standing commitment to ethical values and culture, our aim is to ensure that remuneration policies and practices drive behaviours that are in the long-term interests of the Group and its shareholders. Pay for performance and no reward for failure continue to be key principles. At the same time, pay and benefits must be at a level that will attract, retain and motivate high-calibre people with the skills necessary to achieve our goal of sustained growth in corporate performance. We operate in a global market, with the majority of our revenues being earned from companies located outside the UK and with more than half our employees being based outside the UK. The Group’s continuing strong performance is due principally to the proven abilities of our executive team.

29 ARM Holdings plc Governance and Financial Report 2013

Directors’ Remuneration report continued

In line with the revised remuneration Notwithstanding the tough market conditions Remuneration Committee disclosure regulations that came into force in that continued during 2013, the minimum In this section we describe the composition October 2013, this report is now split into targets, established three years ago under and activities of the Committee during 2013. two sections: both the former LTIP and the former DAB Plan, were exceeded and our executives Committee composition and meeting The Directors’ Remuneration Policy is have been rewarded for their performance attendance during 2013: intended to apply for three years from the as detailed in the Implementation report. It is 2014 AGM. The policy will be subject to a encouraging that shareholders have been Total number binding shareholder vote at the 2014 AGM supportive of our remuneration policies of meetings/ and at least every third year after that. Meetings for many years and that the Remuneration Name of director Position attended report, incorporating our proposed The Implementation report, which sets Philip Rowley Independent non- 5/5 out payments and awards made to the remuneration policy for 2014, received a executive director directors and explains the linkage between 97.6% vote in favour (2.3% vote against; (Committee Group performance and remuneration in 4,850,706 votes withheld) at the 2013 AGM. Chairman until 31 December 2013) respect of 2013. This report will be subject We take an active interest in investors’ views to an advisory shareholder vote at the on remuneration policy, which we were able Andy Green Independent non- 5/5 2014 AGM. to discuss directly with many shareholders executive director through the consultation undertaken in 2013 Larry Hirst Independent non- 5/5 Key decisions on remuneration and actions in connection with the new LTIP. In line with executive director taken in relation to 2013 and 2014 include: my earlier commitment, I also consulted with (Committee shareholders in December 2013 over the EPS Chairman from 1 approval of a pay and benefits package targets applicable to the new LTIP and we January 2014) (including an LTIP top-up) for Simon Segars have taken shareholders’ views into account in Janice Roberts Independent 5/5 on his appointment as Chief Executive setting the new LTIP EPS targets. non-executive Officer. Pay was increased to the same director (joined Finally, I have very much enjoyed my role 28 February 2013) level as applied for the retiring Chief as Committee Chairman and was pleased Executive Officer (see details on page 46); to be able to hand over a coherent and Given their diverse business experience, approval of a base pay increase for the carefully considered remuneration structure the independent non-executive directors executive directors of 3.48% for 2013 and to Larry Hirst, who became Chairman of the who made up the Committee in 2013 3.00% for 2014 compared to the average Committee on 1 January 2014, having been offer a balanced view and international increases for the workforce as a whole of a member of the Committee since he joined expertise in relation to remuneration matters 4.7% for 2013 and 4.35% for 2014; the Board in 2011. At the Annual General for the Group. Janice Roberts joined the Meeting on 1 May 2014, it will be nine years Committee on 28 February 2013 and has setting of performance targets for the since my election by shareholders and I will added valuable knowledge, particularly on bonus plan and new LTIP; therefore be retiring from the Board. I would US compensation matters. approval of pro-rated vesting under like to thank my colleagues on the Committee the LTIP and Deferred Annual Bonus for their hard work and support during (DAB) plans for former Chief Executive my tenure as Chairman and, in particular, Officer Warren East and former Chief during 2013. Commercial Officer Mike Inglis on their retirements from the Group; Philip Rowley Remuneration Committee Chairman  clear documentation of our remuneration (until 31 December 2013) policies as set out in this report.

30 Governance Financial Report

Operation of the Committee short- and long-term strategy and has proved The Committee is able to consider corporate The Chief Executive Officer and the EVP motivational and successful in achieving strong performance on environmental, social and People attend each meeting for at least part business performance over the past few years. corporate governance issues when setting of the time to ensure that the Committee the remuneration of executive directors, The Committee believes that a director’s total and also takes account of pay and conditions is able to obtain their views on the level of remuneration should be monitored against compensation for executive directors and elsewhere in the Group. In particular, the their worth in the external market, with total Committee is mindful of the fact that all other senior executives, although they are reward linked to corporate and individual not present when their own remuneration employees receive share awards (or cash performance. To this end, the Committee equivalents) under the Group’s equity plans. is discussed. The Company Secretary obtains information from independently advises the Committee on corporate published remuneration surveys, benchmarks The Committee does not specifically consult governance matters and acts as Secretary to the total remuneration package, and applies with employees when setting and reviewing the Committee. the following principles: remuneration policy for the executive The Committee’s terms of reference are directors; however, it does review the Base salaries are set at an appropriately published on the corporate website at salary increases for all Executive Committee competitive level. www.arm.com. members against the general employee A significant amount (i.e. more than pay award each year to ensure that there The principal items of business dealt with by 70%) of total potential remuneration is is fairness. Employees have an opportunity the Committee during 2013 are described in performance-related. to raise any concerns over pay and benefits my initial letter. through the annual employee engagement There should be reward for performance survey or direct with their line manager. Remuneration policy but not for failure with an opportunity for Introduction upside for exceptional performance. The Committee believes that the new LTIP and This Remuneration policy section of the bonus arrangements provide a much simpler report has been prepared in accordance Benchmarking provides a useful reference package (similar to the approach adopted in with Schedule 8 to the Large and Medium- point but not a target range for salaries or a largely US dominated sector) and one that sized Companies and Groups (Accounts and other benefits. rewards sustained longer term performance. The new LTIP also rebalances the package Reports) (Amendment) Regulations 2013 A significant element of performance- and will be submitted to shareholders for towards long-term performance and materially related remuneration is provided in the reduces the total quantum released after their approval at the Annual General Meeting form of shares. of the Company to be held on 1 May 2014. three years. In addition, the introduction of The Committee has also taken into account Elements of performance-related variable the new holding periods and increased share the principles set out in Schedule A to the UK remuneration are subject to deferral. ownership guidelines will result in longer term Corporate Governance Code (September performance alignment. Therefore, if share  2012) published by the Financial Reporting Consideration is given to pay and price performance is sustained during the Council, the Listing Rules of the Financial conditions elsewhere in the Group. holding period, then participants are rewarded. Conduct Authority and the ABI’s Principles of If share price performance is not sustained Remuneration published in November 2013. during the holding period then participants are worse off than under the old arrangements. Remuneration Policy for executive directors Relative importance of spend on pay £m and percentage change We believe that sustained growth can be 350 24.1% successfully achieved only with a high level 300 4.8% 292.5 250 22.0% of employee engagement and motivation. 225.0 235.7 200 4.9% 202.9 We believe that it is in shareholders’ best 166.3 150 158.6 interests that the Group is able to attract 28.6% 100 31.3% 36.1% the best talent in the world within our 80.4 –4.1% 50 62.5 60.3 57.8 specialised market. All elements of pay 47.6 44.3 and benefits set out in the policy table are 2011 2012 2013 2011 2012 2013 2011 2012 2013 2011 2012 2013 regarded as necessary to recruit, retain and Sta Pay Distributions to Research and Tax motivate appropriately skilled executives. shareholders development costs The structure of competitive base salaries The above graph illustrates the relative importance of spend on pay compared with other disbursements from profit and higher potential incentives supports both (i.e. distributions to shareholders, the development of new products and tax). These were the most significant outgoings for the Group in the last financial year.

31 ARM Holdings plc Governance and Financial Report 2013

Directors’ Remuneration report (policy)

Remuneration Policy The Directors’ Remuneration Policy below will be put to shareholders for approval at the next Annual General Meeting on 1 May 2014 and is intended to apply for three years from that date. The Policy applies to the executive directors at the date of this report and is intended to apply to any new executive directors who may be appointed during this three- year period.

Component of remuneration package Operation and clawback Maximum potential value Performance conditions, and how it supports business strategy targets assessment and areas of discretion Base salary Base salaries are reviewed annually by the Base salaries are set at an None, although the overall performance To provide an appropriately Committee and are paid monthly in cash appropriate level for each role, of each executive director is considered by competitive level of base salary Increases generally apply from January in each taking account of the factors the Committee when reviewing base salaries. in order to enable the Group year. In its annual review or on promotion, described in this table. Maximum notice period is 12 months and pay to recruit, retain and motivate the Committee considers the following: Generally salaries are no higher in lieu of notice may be made at the discretion executive directors of the calibre Pay levels at companies of similar size than market median, although of the Group. This would include base salary required to achieve the Group’s (by reference to market capitalisation and higher salaries may be paid, if and contractual benefits (pro-rated where business strategy and goal of revenue) on a geographic and global basis. necessary, to recruit externally applicable) and any untaken holiday. sustained growth in corporate External market conditions. or to retain key executives. Fees for outplacement and legal advice may also performance. Pay and benefits elsewhere in the Group. In normal circumstances be paid by the Group. base salary increases will be  Individual performance, skills, experience determined by reference and potential. to average increases for Corporate performance on environmental, employees across the Group. social and corporate governance issues. Greater increases may be Clawback does not apply to base salary approved if there is a substantial (in accordance with contractual agreements). change in a director’s role or responsibilities or if the salary is significantly below the current market rate. In such circumstances, increases may be phased over a number of years and be conditional on performance.

32 Governance Financial Report

Component of remuneration package Operation and clawback Maximum potential value Performance conditions, and how it supports business strategy targets assessment and areas of discretion Performance-related bonus Bonus, if earned, is paid wholly in cash for Maximum bonus: 125% of Amount is subject to achievement of two (in respect of 2014 financial 2014 onwards. base salary. performance targets and then adjusted for year onwards) Paid annually after the Preliminary Bonus payable at target: 85% individual performance: To incentivise executive directors Announcement for the prior year end. of base salary. NOP (50% of target bonus). to achieve performance Bonus payments are not pensionable. Target means the achievement Total revenue (50% of target bonus). objectives that are directly linked Individual performance measures are focused of appropriate maximum Individual performance measures specific to the Group’s short-term on objectives that are specific to each targets in respect of both to each executive director, which flex the financial and strategic goals. executive director. Normalised Operating Profit amount of bonus by a factor of 0.75 to 1.25. (NOP) and total revenue Revenue and profit growth are regarded as Clawback: provisions exist that require and prior to any personal the most appropriate short-term metrics for bonus to be forfeited (i.e. offset of bonus performance adjustment. accruing in that year) or an equivalent value continuing the Group’s performance. Bonus payable at threshold: 0% repaid in exceptional circumstances. These The Committee retains discretion to adjust of base salary. include material misstatement of published bonus targets for any financial year to reflect results and misconduct causing a material Threshold means the minimum intervening events including acquisitions loss and would apply for two years from the level of performance before or disposals. payment of such bonus. The proportion of bonus starts to accrue. The numerical values of targets for any particular the bonus that would be repayable (and could financial year will not be disclosed in advance or be 100%) would depend on the extent to during that year as the Committee considers which the original bonus exceeds that which this information to be commercially sensitive. would have been paid if the results had been The actual targets will be disclosed in the correctly stated, and also taking into account following financial year. any negative impact of the re-statement. Performance-related bonus Bonus earned in respect of 2013 was subject Maximum and target bonus The targets for 2013 bonus were: (in respect of years up to and to the provisions of the DAB Plan. This was opportunity of 150% and 100% 50% of target bonus was dependent on including 2013) the final operation of the DAB Plan. of salary respectively. achieving a NOP target of £313.5m** with To incentivise executive directors Bonus was split 50% cash and 50% deferred 0% payout at £257.7m rising in a linear way to achieve performance shares based on NOP, total revenue and to 25% at £294.6m. objectives that are directly linked individual performance. The NOP portion of bonus can continue to to the Group’s short-term There is compulsory deferral into shares for accrue linearly above the target of £313.5m financial and strategic goals. three years. on a straight-line basis, subject to the overall maximum of 150% of base salary. Revenue and profit growth Bonus matching applies to deferred shares in 50% of bonus was dependent on achieving are regarded as the most the range of 0.3 for 1 to 2 for 1 match subject appropriate short-term a US$ revenue target of US$1,096m** to three-year EPS growth of CPI + 4% to CPI with 0% payout at US$913.2m rising to metrics for continuing the +12% p.a., respectively. 25% at $1,030.1m. Group’s performance. Deferred and any matching shares in relation The revenue portion of bonus can continue to 2013 performance will be received in to accrue above the target of US$1,096m so February 2017. that for every 1% increase in revenue, bonus Dividend shares are added at vesting.* is increased by 2.5% of the target, subject to the overall maximum of 150% of base salary. Provisions exist that could result in immediate forfeiture of shares in the event of dismissal Bonus amount is then subject to an individual for gross misconduct, as determined by the performance multiplier which flexes the Committee and at its discretion. payment by 0.75 to 1.25 again subject to the overall maximum of 150% of base salary.

33 ARM Holdings plc Governance and Financial Report 2013

Directors’ Remuneration report (policy) continued

Component of remuneration package Operation and clawback Maximum potential value Performance conditions, and how it supports business strategy targets assessment and areas of discretion Long-Term Incentive Annual conditional share awards are made Maximum limit of 600% in For the 2014 award vesting is based on: Plan 2013 at 187.5% of base salary with the ability for exceptional circumstances as three-year Total Shareholder Return (first operation in 2014) vesting of between 0% to 200% after three determined by the Committee. (TSR) growth relative to the FTSE All World years dependent on achievement of the To incentivise executive directors By way of example, exceptional Technology Index (25%). performance conditions, with a maximum to achieve performance circumstances could include the of 375% of base salary. three-year TSR growth relative to the objectives that are directly linked hiring of an exceptional senior FTSE 350 (25%). 50% of the vested shares will be subject to executive director in a highly to the Group’s long-term financial three-year normalised EPS growth (50%) and strategic goals. additional holding periods with 25% released competitive market where we after four years and the remaining 25% need to make an exceptional with threshold at 15% annual growth (including To align executive directors’ released after five years. During these new offer in order to recruit. CPI) and the upper performance target at 22% interests with those of the holding periods, shares may not be sold even annual growth (including CPI). shareholders through the if the participant has left the Group. 25% of the respective TSR elements vest for performance conditions and Dividend shares are added at vesting. median performance with 100% vesting for share retention obligations. upper quintile performance. Malus: The Committee has discretion to reduce a share award (including to nil) prior Similarly 25% of the normalised EPS element to vesting where there are exceptional vests at threshold performance with 100% circumstances, which include a material vesting at the upper performance target misstatement in the Group’s published results, with straight line interpolation between these misconduct by the executive director that is two points. deemed to have caused or contributed to a The Committee will review the performance material loss as a result of reckless, negligent conditions for new awards annually. or wilful actions, or inappropriate values The Committee has discretion to waive or or behaviour. change a performance condition if anything Clawback: The Committee has discretion happens that causes the Committee reasonably to clawback shares and executive directors to consider it appropriate, provided that have an obligation under the Rules to transfer any changed performance condition will be shares or pay over the proceeds of sale in no more difficult to satisfy than the original exceptional circumstances (as described condition was intended to be at the time the above). If sold at less than market value, the award was granted. obligation is to pay market value at the date of disposal. Clawback would be less any tax and social security paid or due to be paid. The Committee has discretion to set the length of the clawback period, which would normally be two years from acquisition of the shares. Shareholding requirement Until 200% of salary is achieved, no more than To align executive directors’ 50% of shares received through the DAB Plan interests with those of and LTIP (after the automatic sale of shares to shareholders over a longer time satisfy tax liabilities) can be disposed of. period, they are required to Unvested DAB Plan shares do not count build a shareholding of 200% towards the shareholding requirements. of base salary.

34 Governance Financial Report

Component of remuneration package Operation and clawback Maximum potential value Performance conditions, and how it supports business strategy targets assessment and areas of discretion Long-Term Annual conditional awards normally at 100% Maximum award limit of 400% Vesting is based on: Incentive Plan of salary with the potential for the award to in exceptional circumstances was three-year TSR growth relative to the (in respect of years up to and vest at between 0% and 200% of salary for never used. FTSE All World Technology Index (50%). including 2013) upper decile performance at the end of the three-year performance period. three-year TSR growth relative to the To incentivise executive directors FTSE 350 (50%). Dividend shares are added at vesting. to achieve performance Threshold vesting commencing at median objectives that are directly ranking of TSR group (25% of respective TSR linked to the Group’s long-term elements rising to 100% vesting for an upper financial and strategic goals. decile ranking on a straight-line basis). To align executive directors’ The Committee has discretion to waive or interests with those of the change a performance condition in the event of shareholders through the circumstances which cause the Committee to performance conditions and reasonably consider that: share retention obligations. (a) the amended Performance Condition would be a fairer measure of performance and would be no easier to satisfy; or (b) the Performance Condition should be waived. Pension 10% of base salary for executive directors and 11% of base salary. Not applicable. To provide pension contributions 11% for the Chief Executive Officer is paid in line with market practice, which either into the Group Personal Pension Plan will enable directors to plan or overseas equivalent, or as a cash allowance for retirement. (subject to payroll deductions) for those in excess of the lifetime allowance applicable in the UK. Other benefits Other benefits are provided appropriate Reasonable market cost Not applicable. To provide competitive to the location of the executive director of providing benefits. benefits in line with market and include provision of a car or car and The Committee reserves practice to enable the Group to fuel allowance, long-term sickness and the discretion to provide such recruit and retain high-calibre disability insurance, death in service benefit, situation-specific benefits as executive directors. and healthcare and travel insurance for the may be required in the interests executive director and family. To reward innovation of the Group’s business, and invention. Executive directors may also receive patent such as relocation. Full details bonuses in line with the scheme operated of the exercise of any such by the Group from time to time for patent discretion would be provided applications and on grants of patents. to shareholders in the next Remuneration report.

35 ARM HoldingsHoldings plc GGovernanceovernance and Financial Report 2013

Directors’ Remuneration report (policy) continued

Component of remuneration package Operation and clawback Maximum potential value Performance conditions, and how it supports business strategy targets assessment and areas of discretion Overseas benefits/ Executives based in countries outside Reasonable market cost of Not applicable. Relocation allowances their home country receive other benefits providing benefits for the To provide competitive appropriate to the country in which they duration of the term abroad. benefits in line with market are working. practice to enable the Group to In the event that an executive director agrees recruit and retain high-calibre to move from their home country temporarily executive directors and move the relocation arrangements may include: them to alternative locations Housing allowance or settlement of actual costs. when required by the needs of Disturbance allowance to enable essential the business. household purchases to be made. Cost of living and transportation allowance for the duration of the assignment. Flights home for executive and family. School fees for executive director’s children. Cost of personal tax advice. Cost of visas for executive and family. Cost of transporting executive and family’s personal effects. Legal and estate agents fees associated with properties in home and overseas locations. One-off recruitment cash/ An award of restricted stock units (RSUs) The maximum would be The Committee has discretion to determine equity awards or a grant of options may be made under a sum equal to the value appropriate performance conditions for any To provide an appropriately the Employee Equity Plan to a new recruit of equity foregone, taking award of RSUs, any LTIP award, or any grant attractive package to persuade an to compensate for equity awards foregone account of performance of options taking account of the circumstances external hire to accept an offer with previous employer and/or provide equity conditions attached to the of each individual case. Performance conditions of employment and/or to buy that vests in the three years prior to potential award, likelihood of vesting, would normally be applied on an equivalent out equity that would be lost on vesting of the first LTIP award. and accelerated payment. basis to those applicable to awards made to leaving previous employment. Alternatively a cash payment or an additional other executive directors in the same calendar LTIP award may be made to compensate. year. Performance conditions may, but would not necessarily be applied to any cash payment. Payment may be on taking up appointment or to coincide with vesting dates under the previous employer’s plan. Malus and clawback provisions would apply. Other Contributory ARM currently operates a Save as You The maximum participation Not applicable. Equity Plans Earn Option Scheme in the UK (and some limits will not exceed those set Executive directors are eligible other countries) and an Employee Stock by the relevant tax authorities to participate in the share plan Purchase Plan in the US (and some other from time to time. applicable to the country where countries), which enables employees to buy they work. shares at a discount of up to 20% of market value through regular monthly or fortnightly These plans provide an payroll deductions. opportunity for executive directors to voluntarily invest in the Group. Fees for non-executive Executive directors are permitted to retain any The amounts received are Not applicable. roles held outside the fees paid and/or shares offered in connection disclosed annually. Group with external non-executive roles that Details are provided on To provide executive directors they undertake. page 54. with opportunities to widen their knowledge and experience of the operation of other company boards and Committees, they are permitted to hold non-executive positions at other companies.

36 Governance Financial Report

Component of remuneration package Operation and clawback Maximum potential value Performance conditions, and how it supports business strategy targets assessment and areas of discretion Non-executive directors’ NED fees are proposed by the executive Fees are set at an appropriate Not applicable. (NED) and Chairman’s fees directors and approved by the Board as a level taking into account the To attract and retain an whole. The Chairman’s fee is proposed by the factors outlined in this table. appropriately experienced Committee and approved by the Board as Additional fees are paid to the Chairman and independent a whole with the Chairman taking no part in SID and Committee Chairmen. the decision. non-executive directors An additional fee is paid to of suitable calibre to fulfil NED appointments are terminable on three NEDs based outside the UK a range of different roles months’ notice. who undertake long-haul travel including financial expert/Audit Fees are reviewed on an annual basis and to attend Board meetings in Committee Chairman, Senior take account of fees paid for similar roles by the UK, to reflect the additional Independent Director and peer companies. time commitment. Committee Chairmen. The NEDs and the Chairman are not eligible To pay fees that reflect to receive bonuses, pension contributions and responsibilities and workload nor can they participate in the LTIP or other undertaken, and which equity plans. are competitive with peer companies. The overall fees paid to non-executive directors will remain within the limit stated in our Articles of Association, currently £0.5m which we are seeking approval to increase to £1.0m at the 2014 AGM. Legacy arrangements None. (pre 27 June 2012)

* Dividend shares are additional shares added at vesting equal to the amount of dividends that would have been paid during the deferral period for the DAB Plan and LTIP. ** Calculated at the Group budget exchange rate of £1:US$1.60.

Selection of Performance Measures The Committee has set this range for the LTIP Annual Bonus Plan and how targets are set award made for 2014 and intends to review Performance measures for the Annual LTIP it annually. Changes will be made only if the Bonus Plan are set annually. Each year the targets become inappropriate in changing Performance measures for the new LTIP were Committee considers the most appropriate market conditions. Analysts’ targets are selected after careful consideration by the metrics to apply for the following financial acknowledged as important reference points Committee and following consultation with year. These metrics are currently NOP and for the markets, but there are a number of larger shareholders. The Committee believes Group Revenue. A personal performance factors beyond the control of the Group that the use of both TSR and EPS performance multiplier is then applied related to and the executive directors that may impact measures provide the best alignment to Group achievement of specific personal goals for medium- to long-term EPS performance strategy and encourages, reinforces and each individual. The Committee is of the (such as macro or semiconductor industry rewards the delivery of sustainable shareholder opinion that the numerical values of targets cycles and currency fluctuations). These may value. The TSR element (which accounts for for the Annual Bonus Plan are commercially have impacts that would not necessarily be 50% of total LTIP vesting) was approved by sensitive because they include budgeted seen as underperformance by the Group. shareholders as part of the approval of the numbers within the range of outcomes and The Committee is also keen not to encourage new LTIP at the 2013 AGM. it would be detrimental to the Group to short-term views or behaviour where, in disclose them in advance of or during the The normalised EPS growth performance theory, investment in the long-term future relevant performance period. The actual condition (which accounts for 50% of total (either organically or by acquisition) may be targets will be disclosed in the following LTIP vesting) has been set as follows: discouraged if the EPS range is set at too financial year. high a level. 12.5% vesting for annual growth of 15% (including CPI) rising on a straight-line basis to 50% vesting for annual growth of 22% (including CPI).

37 ARM Holdings plc Governance and Financial Report 2013

Directors’ Remuneration report (policy) continued

Changes to executive directors’ Illustration of Remuneration policy The total remuneration for each of the remuneration for 2014 for 2014 executive directors that could result from The former LTIP approved in 2003 expired The tables below illustrate the level of the proposed remuneration policy in 2014 in 2013 and at that time the Committee took remuneration that could be received by each under three different performance levels is the opportunity to review its entire approach executive director through the operation of shown below. to executive pay. The objective of the review our remuneration policy for 2014. They show Simon Segars was to ensure that the Group’s approach the proportion of total remuneration made Percentages/amounts £000s remains fit for purpose over the next stage up of each component (salary, bonus, LTIP, of its development. The replacement of DAB pension and other benefits) and the Fixed 100% 615 the DAB Plan and former LTIP with the total potential value. It should be noted that On-target 40% 29% 31% 1,534 new Bonus Plan and LTIP will not result in these do not reflect the new LTIP scheme, any increases to the maximum quantum of as entitlements under the new LTIP will not Maximum 28% 29% 43% 2,221 reward delivered. The Committee believes start to vest for three years and we are in a that the new structure provides a much transitional period between the old and new Tim Score Percentages/amounts £000s simpler package (similar to the approach LTIP and bonus plans. For the total amount adopted in a largely US-dominated sector) received by each director in respect of 2013 Fixed 100% 500 and one that rewards only sustained longer- please see the table on pages 46 to 47. term performance. The chart below highlights On-target 32% 24% 44% 1,550 Three scenarios have been illustrated for each the change: Maximum 21% 22% 57% 2,409 Structure of executive directors’ remuneration % of salary of the three executive directors: 600 Fixed element only performance – no bonus, Mike Muller Percentages/amounts £000s 500 no LTIP/DAB vesting. 400 Fixed 100% 342 On-target performance – 85% of base salary 300 in cash bonus, 100% LTIP vesting, 100% DAB On-target 32% 24% 44% 1,066 200 matching shares. Maximum 21% 22% 57% 1,657 100 Maximum performance – 125% of base salary Fixed elements Annual variable Former New in cash bonus, 200% LTIP vesting, 200% DAB Multiple period variable Base salary Cash bonus Potential DAB matching shares. Potential DAB match LTIP Notes: 1. The Fixed element is base salary for 2014 plus the value of pension, allowances and benefits. 2. The annual variable element is the amount of the cash % Increase in pay and benefits from 2012 to 2013 for CEO compared bonus potential. to employees 3. The Multiple period variable is made up of the LTIP and DAB Plan awards that were granted in February 2012 and CEO* Employees have a performance period ending in 2014. Base Salary 2.0% 4.7% 4. The values included assume a constant share price from date of grant. The actual value received will be higher or Benefits and pension** 65.6% -5.0% lower depending on the share price at vest. Bonus*** –12.7% 9.6% 5. The annual variable elements would have been three percentage points higher under the previous year’s remuneration arrangements, as the on-target bonus was * The percentages for the CEO reflect the pay and benefits for Warren East for the first half of the year and for Simon Segars 100% and the maximum bonus was 150%. for the second half of the year. ** The large increase in the benefits and pension of the CEO in 2013 was due to allowances paid to Simon Segars as a result of his placement in the US. Warren East received no such allowance in 2012. *** The CEO’s bonus percentage reflects the decrease in the bonus received by Simon Segars for the year to 31 December 2013 compared to the bonus received by Warren East for the year to 31 December 2012. On his appointment as CEO on 1 July 2013, Simon Segars’ base salary was increased from £300,000 to £500,000. Since his bonus is calculated on pro-rata basis, his bonus for 2013 was lower than that received by Warren East for 2012, despite the higher overall percentage paid.

38 Governance Financial Report

Service contracts The dates of the service contracts of each The term of appointment for non-executive Our policy is for notice periods for executive person who served as an executive director directors is three years, which can be rolled directors to be of one year’s duration and during the financial year are as follows: forward for two further periods each of three each of the executive directors’ service years, which would be subject to annual review. contracts reflects this. These agreements Director Date Appointments are subject to termination provide for each of the directors to provide Simon Segars 18 March 2013 on three months’ notice. Fees paid to non- executive directors are reviewed annually services to the Group on a full-time basis Tim Score 1 March 2002 and contain restrictive covenants for with effect from 1 January. Mike Muller 31 January 1996 periods of three to six months following Termination of employment termination of employment relating to non- Mike Inglis competition, non-solicitation of the Group’s (retired 31 March 2013) 17 July 2002 In the event of termination of an executive director’s contract of employment, customers, non-dealing with customers, and Warren East non-solicitation of the Group’s suppliers (retired 30 June 2013) 29 January 2001 compensation would be based on salary and and employees. In addition, each service contractual benefits during the notice period contract contains an express obligation of Service contracts for the executive directors and whether the departing director is deemed confidentiality in respect of the Group’s trade and appointment letters for the Chairman and to be a good leaver under the rules of the secrets and confidential information and non-executive directors are available to view bonus plan, the 2013 LTIP, the former LTIP, provides for the Group to own any intellectual in the Corporate Governance section of our and the former DAB Plan. property rights created by the directors in the website at www.arm.com/reporting2013. course of their employment.

Contractual provisions/Plan Rules Exit Payment Policy Service contracts Payment of contractual entitlements, including payment in lieu of Maximum notice period is 12 months and pay in lieu of notice may notice in appropriate circumstances, where certainty and protection be made at the discretion of the Group. of restrictive covenants are in the best interests of the Group. This would include base salary and contractual benefits (pro-rated Termination payments would take into account the particular where applicable) and any untaken holiday. circumstances relevant to each individual situation. Fees for outplacement and legal advice may also be paid by the Group. LTIP For good leavers conditional awards under the LTIP would normally In relation to both the LTIP and Bonus Plan: in assessing whether vest pro-rata to time served and the extent to which the performance an executive director is a good leaver in retirement circumstances, conditions are satisfied at the date of termination of employment. the executive director is required to confirm future intentions to For bad leavers, unvested share awards would lapse on termination the Committee (including that he or she will not accept a full-time of employment. executive role in a commercial organisation). If the Committee determines that the executive director is a good leaver and Bonus Plans There is no automatic entitlement to annual bonus. In the event of subject to satisfaction of performance targets, pro-rated vesting of death or leaving as a result of disability or ill health, pro-rata bonus entitlements under the old and new LTIPs and bonus plans would may be paid for the year of cessation. normally be approved. Bad leavers would not receive performance-related bonus awards in The holding periods described in the Remuneration Policy table would relation to the year of cessation. apply to any shares that vest under the LTIP. Clawback provisions exist that require bonus to be forfeited (i.e. offset of bonus accruing in that year) or an equivalent value repaid should it be necessary for the Group to re-state to a material extent the financial results on which the bonus was awarded within two years of the payment of such bonus. The proportion of the bonus that would be repayable (which could be 100%) would depend on the extent to which the original bonus exceeds that which would have been paid if the results had been correctly stated, also taking into account any negative impact of the re-statement. Former DAB Plan Deferred shares under the former DAB Plan would vest on termination. Deferred shares can be forfeited in certain circumstances. Matching shares vest, to the extent the performance conditions are satisfied, for good leavers only.

39 ARM Holdings plc Governance and Financial Report 2013

directors’ remuneration report (implementation) Ba lancing short and l ong-term remuneration

Base salary increase for 2013 and 2014 Current incentive arrangements and Shares earned are satisfied through the issue For 2013, the average increase in base salaries their operation in respect of 2013 of new shares (any treasury shares available for the executive directors was 3.48% and financial year would be used first). the average increase for the workforce as For 2013 there were four key incentive Each of the executive directors achieved a a whole was 4.7%. On his appointment as schemes in operation across the workforce personal performance multiplier of at least Chief Executive Officer on 1 July 2013, the as a whole. These are as follows: 1.15 for 2013, which means bonus received Committee approved a salary increase for For executive directors and senior managers: was in the range 136% to 144% of salary, Simon Segars to £500,000, which was at the half of which was compulsorily deferred into same level as the retiring Chief Executive The final annual bonus award under the shares for three years. Actual bonuses are Officer. For 2014 the average increases are DAB Plan. detailed in the table on page 48. 3.0% for the executive directors and 4.35% for the workforce as a whole. Within the An annual conditional award under The revenue target is set in US dollars to overall increase for 2014, the range was 3.4% the LTIP. reflect the main currency in which revenues for the US rising to 8.0% in Asia, reflecting are earned. local market conditions and salary inflation. For all other employees: The NOP target range was from zero payout Shareholding requirements Awards under the Annual Bonus Plan. at £257.7 million up to 25% at £294.6 million In order to align executives’ interests with and 50% at £313.5 million, all at the Group Employee Equity Plan. those of shareholders over a longer time budget exchange rate of £1:US$1.60. period, all Executive Committee members Option grants to executive directors ceased Shares representing the deferred element of are now required to build a shareholding in 2006 (although the facility to grant options bonus earned in 2010 and awarded in 2011 of 200% of base salary (an increase from exists in exceptional circumstances). The move vested in February 2014, with the maximum the previous level of 100% of base salary). away from options to restricted shares for all 2:1 ratio of matching shares being triggered. For other participants in the new LTIP, the employees has reduced potential dilution and This ratio was achieved because EPS growth shareholding requirement has increased from has simplified remuneration arrangements. was 120.4%, which is greater than CPI plus 50% to 100% of base salary. 12% per annum on average for the three We significantly out-performed our years making up the performance period. Unvested DAB Plan shares do not count international peer group over the last three towards the shareholding requirements. years, which resulted in 183.7% vesting of the At normalised EPS growth equal to the Until these levels are achieved, no more than LTIP awards made in 2011 when the share increase in the Consumer Prices Index (CPI) 50% of shares received through the DAB price was 611 pence per share and full vesting plus 4% per annum, the deferred shares will Plan and LTIP (after the automatic sale of of the DAB Plan matching share awards made be matched on a 0.3:1 basis, rising to 2:1 shares to satisfy tax liabilities) can be disposed in respect of 2010. To put the awards that when EPS growth is in excess of CPI plus 12% of by participants. For 2014 a transitional are currently outstanding under the LTIP and per annum. These targets are directly related arrangement is in place for participants below DAB Plan into context, the share price was to the Group’s financial results and encourage Executive Committee level under which 568 pence per share for the February 2012 achievement of the Group’s short-term 20% of net shares vesting must be retained. awards and 924.5 pence per share for the financial goals, while the deferral and matching This will increase to 50% for 2015 onwards. February 2013 awards. The share price was elements encourage a longer term view At the present share price, all of the executive 896 pence per share on 7 February 2014 of the success of the Group. The deferred directors meet the 200% of base salary being the day before the 2014 LTIP and final shares can be forfeited in the event of gross shareholding requirement. DAB Plan awards were made. misconduct and the matching shares are subject to forfeiture for “bad leavers”. Collectively the Executive Committee, including the executive directors, held 3.7 million shares with a value of £36.8 million at 3 March 2014. This currently equates to a multiple of 10 times base salaries.

40 Governance Financial Report

New Bonus Plan for 2014 Revenue and profit growth are regarded The individual performance multipliers for As part of the new structure for executive as the best drivers to increase market share the executive directors are then approved by remuneration and in particular the new LTIP and continue the Group’s outperformance the Committee. of semiconductor market growth. (which was consulted on with shareholders The numerical values of targets for any in 2012/13 and approved by shareholders at The Committee retains discretion to adjust particular financial year will not be disclosed in the 2013 Annual General Meeting), bonuses, bonus targets for any financial year to reflect advance or during that year as the Committee if earned, will be paid wholly in cash for 2014 intervening events including acquisitions or considers this information to be commercially onwards. The maximum bonus opportunity disposals. It should be noted that the individual sensitive. The commercial sensitivity relates to has reduced from 150% to 125% of base performance multiplier when applied to the the use of current year budget revenue within salary, bonus payable at target has reduced executive directors normally falls within a the range of outcomes. The actual targets will from 100% to 85% of base salary and no relatively narrow range at the upper end. be disclosed in the following financial year. bonus is paid at threshold. This results from the fact that maintenance of a very high level of performance is a The bonus targets set by the Committee Target constitutes the achievement of for each year are intended to be stretching appropriate maximum targets in respect pre-requisite to continuation in the role of executive director. Performance is reviewed but motivational and average bonus paid to of both NOP and total revenue and prior the executive directors over the past five to any personal performance adjustment. on an in-depth basis on at least an annual basis by the CEO (for the other executive years was 125% of salary (with a range from The amount is subject to the achievement directors) and by the Chairman for the CEO. 84% payout for 2009 to 150% for 2011) of two performance targets and then adjusted as shown below: for individual performance:

NOP – 50% of target bonus. Average percentage bonus paid over the past five years to executive directors Total revenue – 50% of target bonus. 200% Individual performance multiplier specific 150% to each executive director, which flexes the bonus amount by a factor of 0.75 to 1.25. 100% % of base salary 50% 576.9 0% 2009 2010 2011 2012 2013

Notes: 1. 2010 maximum bonus was limited to 125% of base salary. 2. For 2011, 2012 and 2013 maximum bonus was 150% of base salary. 3. For 2014 onwards maximum bonus is 125% of base salary.

41 ARM Holdings plc Governance and Financial Report 2013

directors’ remuneration report (implementation) continued

Linkage of bonus targets to Long-Term Incentive Plan The vesting of the 2011 LTIP awards in business strategy Former LTIP February 2014 was at 183.7% as a result of our significant outperformance compared to The personal performance multiplier depends Under the former LTIP, annual conditional our international peer group over the past on the achievement of pre-determined awards to executive directors were normally three years. Subject to achievement of the objectives, which are reviewed and approved made at a level equivalent to base salary. performance conditions, the final outstanding by the Committee each year. These include Conditional awards vest to the extent awards under the former LTIP will vest key strategic objectives related to each that the performance criteria are satisfied in 2016. director’s role and responsibilities (such as over a three-year performance period compliance with the Management Charter, from 1 January of the year of award, New LTIP which is designed to foster employee with no subsequent re-testing permitted. development), understanding of the The new LTIP was approved by shareholders The performance conditions are based on at the 2013 Annual General Meeting overall vision and strategy of the Group, the Company’s TSR when measured against and good governance. The Committee is and is described in more detail in the that of two comparator groups (each testing Remuneration Policy summary earlier in able to consider corporate performance half of the shares comprised in the award). on environmental, social and corporate this report. Annual awards are made up The first index comprises UK companies to a normal maximum of 375% of base governance issues when setting the across all sectors (FTSE 350) and the second remuneration of executive directors. salary. Dividend shares are added at vesting. comprises predominantly US companies Vesting is based on: within the hi-tech sector (FTSE All World Technology Index). Three-year relative TSR growth relative to the FTSE All World Technology Index (25%). For each comparator group, the number of shares that may vest may be up to a Three-year relative TSR growth relative to maximum of 200% of the relevant half of the FTSE 350 (25%). the shares comprised in the conditional award if the Company’s TSR ranks in the Three-year EPS growth (50%). upper decile, 50% of the relevant half of the shares will vest in the event of median 25% of the respective TSR elements vest for performance and between median and upper median performance, with 100% vesting for decile performance vesting will increase on upper quintile performance. a straight-line basis. Additional shares may Similarly 25% of the EPS element vests at vest to cover dividends paid by the Company threshold performance (annual growth in during the performance period. No shares will EPS of 15% including CPI) and 100% vests at be received for below-median performance. maximum performance (annual growth in EPS In addition, no shares will vest unless the of 22% including CPI) and rising on a straight- Committee is satisfied that there has been line basis between these two points. a sustained improvement in the underlying financial performance of the Group. 50% of the vested shares will be subject to additional holding periods with 25% released after four years and the remaining 25% released after five years. During these new holding periods, shares may not be sold even if the participant has left the Group.

42 Governance Financial Report

The Committee gave particularly careful Former share option schemes thought to this range, taking into account a The remaining shares of the final option grant number of factors including internal forecasts to executive directors made in 2006 vested and updated market consensus, balanced in accordance with the rules of the scheme in with the need to create a real incentive over February 2013. the long-term. Another key factor was the need for the Group to have the flexibility to Pensions make appropriate investments with a view The Group does not operate its own pension to generating long-term shareholder value scheme but makes payments into a group (recognising the typical timelines in which personal pension plan, which is a money investments in technology give rise to licence purchase scheme. For executive directors, and royalty revenue). The range is considered the normal rate of Group contribution is to be challenging and significantly exceeds the 10% of the executive’s basic salary, or 11% EPS growth range for awards granted under in the case of the Chief Executive Officer the former DAB Plan (being CPI + 4% to (plus additional amounts in accordance CPI + 12%). with the Group’s salary sacrifice scheme). Full details of Group contributions are set Our intent is to review these targets on out in the directors’ emoluments table later an annual basis, taking account of market in this report. Since 2011, to the extent that conditions and any other relevant factors contributions cannot be made in a tax efficient to ensure that they remain appropriate in way at the 10/11% of basic salary level, the context of the factors set out above. the difference is paid as an additional cash The Committee will review their applicability allowance (and subject to appropriate tax and on an annual basis, so that in the event that other deductions). exceptional circumstances arise, such as material corporate activity or substantial Compensation for loss of office changes in market conditions, their impact No payments were made during 2013 can be considered against subsequent annual to former executive directors by way of awards. If changes are to be proposed for compensation for loss of office, or pay in any prospective LTIP award, it would be the lieu of notice. Committee’s intention to confirm any such change to shareholders in advance.

43 ARM Holdings plc Governance and Financial Report 2013

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Performance graphs The Committee considers the FTSE A performance graph showing the All-World Technology Index to be an Company’s TSR together with the TSRs for appropriate choice as the Index contains the FTSE All-World Technology Index and companies from the US, Asia and Europe the FTSE 350 from 31 December 2008 is and therefore reflects the global environment shown below. The TSR has been calculated in in which the Group operates. In addition, accordance with the Directors’ Remuneration the Index includes many companies that are Report Regulations 2002. currently the Group’s customers, as well as companies that use ARM technology in their The TSR for the Company’s shares was end products. 1,231% over this period compared with 148% for the FTSE All-World Technology Index for the same period.

ARM total shareholder return performance from 31 December 2008 to 31 December 2013 1400

1200

1000

800

600

400

200

Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13

ARM FTSE All-World Technology FTSE 350

CEO’s Pay for the last five financial years

Year 2009 2010 2011 2012 2013 CEO’s total single figure £* Warren East (retired 30 June 2013) 2,010,584 7,570,679 7,744,982 6,709,569 3,415,729 Simon Segars (appointed CEO 1 July 2013) – – – – 2,064,907 CEO’s total single figure £ 2,010,584 7,570,679 7,744,982 6,709,569 5,480,636 Bonus % of maximum award % 67% 100% 100% 85% 91% LTIP % of maximum vesting % 91% 100% 100% 100% 92% DAB % of maximum vesting % 0% 100% 100% 100% 100%

* Warren East retired on 30 June 2013 and was succeeded by Simon Segars. The CEO’s total single figure for 2013 represents the pay, benefits and pension received by Warren East for the first half of the year as well as the market value at vesting of the shares received by him on his retirement under the rules of the LTIP and DAB Plans. This figure also includes the pay, benefits, bonus and pension received by Simon Segars for the second half of the year as well as the market value of the shares received by him under the LTIP and DAB Plans in respect of the financial year to 31 December 2013.

44 Governance Financial Report

Non-executive directors In addition to the interests disclosed above, Share dilution During 2013, the Chairmen of the Audit and the executive directors have interests in It is proposed that the Group will continue Remuneration Committees each received dividend shares that could be awarded to manage dilution within the context of a total fee of £70,000 per annum and the under the former and current LTIPs and maintaining award levels within a 10% limit other non-executive directors each received the former DAB Plan, the amount of which over five years (excluding rolled over Artisan a total fee of £55,000 per annum. In line will depend on the extent to which the options), the limit that has applied since 2003. with fee arrangements in place in other performance criteria are satisfied and on the We are aware that this is higher than the limit companies of similar size and complexity, the dividends declared during the performance of 5% over ten years in respect of discretionary executive directors have implemented new period. Changes in directors’ interests in the awards and 10% over ten years in respect of arrangements from 1 January 2014 as follows: Company’s shares that have taken place in the all schemes adopted by many UK companies period from 31 December 2013 to the date and preferred by many institutional investors. A standard fee of £60,000 per annum. of approval of the Remuneration report are The reasons for this higher limit, which was shown above. Additional fees for Committee Chairmen approved by shareholders when the former and the Senior Independent Director of External advisers LTIP was introduced, are at least as strong £16,000 per annum. today. These are the broad-based nature of The Committee has access to independent our equity plans (which cover all employees) professional advice on remuneration This is believed to more fairly reflect the and the need to be able to compete with US matters. Following a competitive tender companies worldwide for the high-calibre workload undertaken by Committee process, Towers Watson were appointed Chairmen and the Senior Independent engineers and executives required to secure by the Committee in 2010, and Committee the Group’s future success. The Committee Director. The additional fee of $2,500 per members continue to be satisfied that their meeting which is paid to non-executive is keenly aware of this issue, and will continue advice is objective and independent and their to keep well below the 10% upper limit. directors who are based in the US and travel fees are in line with market practice. Access to to the UK for Board meetings will continue Dilution over the past five years has been their global database and expertise is an 6.85%. at this level. This is to reflect their additional important factor in considering remuneration time commitment. matters across the senior executive team. The Chairman’s fee for 2013 was at the Work undertaken by Towers Watson in rate of £390,000 per annum and increased 2013 included advice on the structure and by 2.6% for 2014 to the rate of £400,000 targets for the new LTIP, new CEO and senior per annum. executive packages, and the Remuneration Policy summary in this report, for which total Non-executive directors do not have service fees of £52,000 were paid during the year. contracts and are not eligible to participate The Committee also received advice from in bonus or share incentive arrangements. Kepler Associates who provided independent Their service does not qualify for pension verification of Total Shareholder Return (TSR) purposes or other benefits, and no element calculations for the LTIP. of their fees is performance-related. The former EVP Human Resources and the current EVP People also provided advice to the Committee in 2013.

45 ARM Holdings plc Governance and Financial Report 2013

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Audited information The following information has been audited by the Company’s auditors, PricewaterhouseCoopers LLP, as required by the Companies Act 2006.

Total amount of salary and fees All taxable benefits Bonus payments Director £ £* £** 2013 2012 2013 2012 2013 2012 Executive

Simon Segars**** 400,000 280,000 73,186 93,284 543,454 370,605 Tim Score 415,000 400,000 26,031 25,178 599,374 529,436 Mike Muller 285,000 275,000 14,940 15,087 403,718 349,428 Warren East (retired 30 June 2013) 250,000 490,000 17,041 15,087 – 622,617 Mike Inglis (retired 31 March 2013) 71,250 280,000 11,293 14,692 – 355,781 Tudor Brown (retired 3 May 2012) – 77,586 – 9,741 – –

Total 1,421,250 1,802,586 142,491 173,069 1,546,546 2,227,867 Non-executive

Sir John Buchanan (appointed 3 May 2012) 390,000 258,879 – – – – Andy Green 55,000 52,000 – – – – Larry Hirst 55,000 52,000 – – – – Eric Meurice (appointed 1 July 2013) 27,500 – – – – – Kathleen O’Donovan 70,000 65,000 – – – – Janice Roberts 61,399 58,314 – – – – Philip Rowley 70,000 65,000 – – – – Doug Dunn (retired 3 May 2012) – 62,069 – – – – Young Sohn (retired 31 December 2012) – 59,906 – – – –

Total 728,899 673,168 – – – –

Total 2,150,149 2,475,754 142,491 173,069 1,546,546 2,227,867

* All the executive directors receive family healthcare and annual travel insurance as part of their benefits in kind. In addition, Tim Score has the use of a company car with fuel benefit and Warren East, Tudor Brown, Mike Inglis and Mike Muller received a car and petrol allowance. Simon Segars receives £61,283 living, transportation and other allowances as part of his placement in the US. Warren East, Mike Inglis and Tudor Brown received an additional cash allowance in place of Group pension contributions that can no longer be contributed in a tax-efficient way. ** The bonus payments above represent the full bonus earned during 2013. According to the terms of the DAB Plan, 50% of this bonus is not paid in cash, but is deferred and becomes payable in shares after three years. Details of the awards made in February 2012 in respect of these deferrals are detailed above. *** These include the value of shares received by Tudor Brown, Mike Inglis and Warren East on LTIP and DAB plans on their retirements. **** For the first half of 2013, Simon Segars’ salary was £300,000. Following his appointment to CEO on 1 July 2013, his salary increased to £500,000, resulting in an average for the year of £400,000. Executive directors’ annual salaries were increased from 1 January 2014, each by 3% to the following amounts: Simon Segars £515,000; Tim Score £427,450; and Mike Muller £293,550. The Group has adopted the single total figure performance measure in the year. Under the new guidance, share price appreciation of scheme interests that vest in the year, for which the performance conditions were met in a prior year, are excluded from the single figure table. The comparative amounts have been amended to reflect the new guidance.

46 Governance Financial Report

Money and other assets receivable for periods of more than one financial year All pension-related benefits Total £*** £ £ 2013 2012 2013 2012 2013 2012

1,207,360 3,319,547 44,000 30,800 2,268,000 4,094,236 1,727,783 4,783,187 44,156 42,560 2,812,344 5,780,361 1,193,633 3,276,928 32,148 31,020 1,929,439 3,947,463 3,123,688 5,532,865 25,000 49,000 3,415,729 6,709,569 1,680,367 3,341,919 7,125 28,418 1,770,035 4,020,810 – 1,380,904 – 10,167 – 1,478,398

8,932,831 21,635,350 152,429 191,965 12,195,547 26,030,837

– – – – 390,000 258,879 – – – – 55,000 52,000 – – – – 55,000 52,000 – – – – 27,500 – – – – – 70,000 65,000 – – – – 61,399 58,314 – – – – 70,000 65,000 – – – – – 62,069 – – – – – 59,906

– – – – 728,899 673,168

8,932,831 21,635,350 152,429 191,965 12,924,446 26,704,005

47 ARM Holdings plc Governance and Financial Report 2013

directors’ remuneration report (implementation) continued

Deferred Annual Bonus Plan in respect of 2013 financial year This was the final operation of the DAB Plan which will be replaced by the new Annual Bonus Plan and LTIP for 2014 onwards. Details of these new plans are included in the Remuneration Policy summary earlier in this report. The deferred and matching share elements of the DAB Plan will continue to vest over the next three years and all new awards will be made under the new LTIP and the Annual Bonus Plan. As demonstrated in this summary, there is a highly variable element to executive directors’ remuneration. For 2013, target and maximum bonus of 100% and 150% of base salary respectively (after application of an individual performance multiplier which flexes the payment by 0.75 to 1.25) could be earned through the DAB Plan if all targets were met. The strong performance of the Group in 2013 resulted in achievement of both of the equally weighted bonus targets, as set out below:

Bonus % achieved 2013 Bonus targets Target Actual of base salary Revenue US$1,096.0m US$1,117.7m 55.0% NOP* £313.5m £332.6m 62.9% Total 117.9%

* NOP for bonus purposes is calculated using the Group budget exchange rate of £1:US$1.60 for 2013.

The executive directors received the following payments in respect of the performance of the company in 2013:

Total Bonus 50% deferred Shares Salary Bonus % Personal bonus paid in shares awarded Director £ achieved multiplier % £ £ Number Simon Segars (until 30 June 2013) 300,000 117.9 1.150 135.59 201,706 Simon Segars (from 1 July 2013) 500,000 117.9 1.150 135.59 341,748 Simon Segars Total for year* 543,454 271,727 30,327 Tim Score 415,000 117.9 1.225 144.43 599,374 299,687 33,447 Mike Muller** 285,000 117.9 1.200 141.48 403,218 201,609 22,501

* Simon Segars’ bonus was calculated pro-rated on a daily basis. ** In addition to his DAB bonus, Mike Muller received a £500 bonus for filing a patent.

Money and other assets receivable for periods of more than one financial year. The executive directors received the following in February 2014, in respect of performance periods ending in 2013:

Market value Market value of LTIP at of DAB matching Total vesting shares at vesting received Director £ £ £ Simon Segars 734,433 472,927 1,207,360 Tim Score 1,049,565 678,218 1,727,783 Mike Muller 726,208 467,425 1,193,633 Warren East (retired 30 June 2013) 1,822,138 1,301,550 3,123,688 Mike Inglis (retired 31 March 2013) 921,076 759,291 1,680,367 Total 5,253,420 3,679,411 8,932,831

48 Governance Financial Report

The executive directors received the following in February 2013, in respect of performance periods ending in 2012:

Market value Market value of LTIP at of DAB matching Total vesting shares at vesting received Director £ £ £ Simon Segars 2,376,446 943,101 3,319,547 Tim Score 3,408,086 1,375,101 4,783,187 Mike Muller 2,348,822 928,106 3,276,928 Warren East (retired 30 June 2013) 3,960,771 1,572,094 5,532,865 Mike Inglis (retired 31 March 2013) 2,394,880 947,039 3,341,919 Tudor Brown (retired 3 May 2012) 928,941 451,963 1,380,904 Total 15,417,946 6,217,404 21,635,350

LTIP vesting in 2013 The performance conditions applicable to the conditional awards granted on 8 February 2010 were satisfied in respect of the performance period ended 31 December 2012 to the extent of 200% plus dividend shares which vested on 8 February 2013, as follows:

Market value Conditional award Vested award Dividend shares Total award at vesting Director Number Number Number Number £ Simon Segars 125,853 251,706 5,346 257,052 2,376,446 Tim Score 180,487 360,974 7,667 368,641 3,408,086 Mike Muller 124,390 248,780 5,284 254,064 2,348,822 Warren East (retired 30 June 2013) 209,756 419,512 8,911 428,423 3,960,771 Mike Inglis (retired 31 March 2013) 126,829 253,658 5,388 259,046 2,394,880 Total 767,315 1,534,630 32,596 1,567,226 14,489,005

The amount vested above represents the maximum award under the LTIP. This is based on the total shareholder return as calculated below:

Comparator Group ARM TSR percentile rank Implied vesting FTSE 350 Index 99.4% 200% FTSE All World Technology Index 100% 200% Overall 200%

LTIP vesting in 2014 The performance conditions applicable to the conditional awards granted on 8 February 2011 were satisfied in respect of the performance period ended 31 December 2013 to the extent of 183.7% plus dividend shares which vested on 8 February 2014, as follows:

Market value Conditional award Vested award Dividend shares Total award at vesting Director Number Number Number Number £ Simon Segars 43,863 80,576 1,392 81,968 734,433 Tim Score 62,684 115,150 1,989 117,139 1,049,565 Mike Muller 43,372 79,674 1,376 81,050 726,208 Total 149,919 275,400 4,757 280,157 2,510,206

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The amount vested above is based on the total shareholder return as calculated below:

Comparator Group ARM TSR percentile rank Implied vesting FTSE 350 Index 81.3% 167.4% FTSE All World Technology Index 90.0% 200.0% Overall 183.7%

In accordance with the rules of the LTIP, on his retirement on 31 March 2013, Mike Inglis received the following shares under the Plan calculated on a pro-rata basis and reflecting the extent to which the performance conditions were satisfied at that date:

Market value Conditional award Vested award Dividend shares Total award at vesting Grant Number Number Number Number £ 8 February 2011 44,190 52,683 – 52,683 551,064 8 February 2012 49,295 35,374 – 35,374 370,012 Total 93,485 88,057 – 88,057 921,076

In accordance with the rules of the LTIP, on his retirement on 30 June 2013, Warren East received the following shares under the Plan calculated on a pro-rata basis and reflecting the extent to which the performance conditions were satisfied at that date:

Conditional Vested Dividend Total Market value award award shares award at vesting Grant Number Number Number Number £ 8 February 2011 77,741 122,434 – 122,434 1,085,377 8 February 2012 86,267 83,109 – 83,109 736,761 Total 164,008 205,543 – 205,543 1,822,138

In accordance with the rules of the LTIP, on his retirement on 3 May, 2012, Tudor Brown received the following shares under the Plan calculated on a pro-rata basis and reflecting the extent to which the performance conditions were satisfied at that date:

Market value Conditional award Vested award Dividend shares Total award at vesting Grant Number Number Number Number £ 8 February 2010 106,341 165,679 – 165,679 796,088 8 February 2011 36,007 27,649 – 27,649 132,853 Total 142,348 193,328 – 193,328 928,941

The following conditional awards over ordinary shares were made under the LTIP on 8 February 2014: Simon Segars 107,770; Tim Score 89,449 and Mike Muller 61,429. The mid-market closing price of an ordinary share on 7 February 2014, being the business day prior to the date of these conditional awards, was 896 pence.

50 Governance Financial Report

Deferred Annual Bonus Plan There is a compulsory deferral of 50% of the annual bonus earned by executive directors in the year. The emoluments detailed above include the full bonus earned for 2013, although only half has been settled in cash and the deferred elements will be settled in shares after three years. The total number of deferred shares held under the DAB Plan by the directors following confirmation of 2013 bonus is:

Shares deferred as part of Shares deferred as part of Shares deferred as part of the 2011 bonus the 2012 bonus the 2013 bonus Total awards Director Number Number Number Number Simon Segars 35,387 20,045 30,327 85,759 Tim Score 50,572 28,637 33,447 112,656 Mike Muller 34,991 18,900 22,501 76,392 Total 120,950 67,582 86,275 274,807

The performance conditions applicable to the matching awards relating to the deferred elements of the annual bonus for 2010 were satisfied to the extent of 200% matching shares plus dividend shares which vested on 8 February 2014, as follows:

Shares deferred as part of the 2010 bonus Matching shares Matching shares Dividend shares Total award Director Number Number Value £ Number Number Simon Segars 26,391 52,782 472,927 456 79,629 Tim Score 37,847 75,694 678,218 654 114,195 Mike Muller 26,084 52,168 467,425 451 78,703 Total 90,322 180,644 1,618,570 1,561 272,527

The market value of an ARM share on the date of vesting was 896.0 pence. The matching shares vesting above represent the maximum award under the DAB Plan. This award is based on an EPS growth rate before inflation of 120% per annum compared with a target growth rate of CPI plus 12% per annum on average for the three years making up the performance period. In accordance with the rules of the DAB Plan, on his retirement on 31 March 2013, Mike Inglis received the following shares calculated on a pro- rata basis and reflecting the extent to which the performance conditions were satisfied at that date:

Shares deferred as part of the bonus Matching shares Matching shares value Total award Grant Number Number £ Number 2011 26,595 39,831 416,632 66,426 2012 35,651 29,629 309,919 65,280 2013 19,244 3,130 32,740 22,374 Total 81,490 72,590 759,291 154,080

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In accordance with the rules of the DAB Plan, on his retirement on 1 July 2013, Warren East received the following shares calculated on a pro- rata basis and reflecting the extent to which the performance conditions were satisfied at that date:

Shares deferred as part of the bonus Matching shares Matching shares value Total award Grant Number Number £ Number 2011 43,985 73,186 648,794 117,171 2012 62,720 62,550 554,506 125,270 2013 33,677 11,083 98,251 44,760 Total 140,382 146,819 1,301,550 287,201

The performance conditions applicable to the matching awards relating to the deferred elements of the annual bonus for 2009 were satisfied to the extent of 200% matching shares plus dividend shares which vested on 8 February 2013, as follows:

Shares deferred Matching as part of Matching shares the bonus shares award Dividend shares Total awards Director Number Number £ Number Number Simon Segars 51,006 102,012 943,101 1,082 154,100 Tim Score 74,370 148,740 1,375,101 1,578 224,688 Mike Muller 50,195 100,390 928,106 1,065 151,650 Warren East 85,024 170,048 1,572,094 1,804 256,876 Mike Inglis 51,219 102,438 947,039 1,087 154,744 Total 311,814 623,628 5,765,441 6,616 942,058

The market value of an ARM share on the date of vesting was 924.5 pence. The matching shares vesting above represent the maximum award under the DAB Plan. This award is based on an EPS growth rate before inflation of 170% compared with a target growth rate of CPI plus 12% per annum on average for the three years making up the performance period. In accordance with the rules of the DAB Plan, on his retirement on 3 May, 2012, Tudor Brown received the following shares calculated on a pro‑rata basis and reflecting the extent to which the performance conditions were satisfied at that date:

Shares deferred Matching as part of Matching shares the bonus shares award Total award Grant Number Number £ Number 2010 43,427 67,659 325,102 111,086 2011 22,299 19,875 95,499 42,174 2012 29,049 6,527 31,362 35,576 Total 94,775 94,061 451,963 188,836

52 Governance Financial Report

Share awards Details of conditional awards made in the year to 31 December 2013 under the LTIP and deferred shares granted under the DAB in the year to 31 December 2013 plan by the directors are as follows:

Share price at Type of Basis of Date of award date Vesting Face value* % vesting at Director award award award Number £ date £ threshold** Simon Segars LTIP 100% of salary 8 February 2013 32,449 9.245 8 February 2016 600,000 50% 100% of payrise for 2013 on Simon Segars LTIP becoming CEO 13 August 2013 11,280 8.865 13 August 2016 200,000 50% 50% of bonus paid in respect Simon Segars DAB of 2012 8 February 2013 20,045 9.245 8 February 2016 370,605 100% Tim Score LTIP 100% of salary 8 February 2013 44,889 9.245 8 February 2016 830,000 50% 50% of bonus paid in respect Tim Score DAB of 2012 8 February 2013 28,637 9.245 8 February 2016 529,436 100% Mike Muller LTIP 100% of salary 8 February 2013 30,827 9.245 8 February 2016 570,000 50% 50% of bonus paid in respect Mike Muller DAB of 2012 8 February 2013 18,900 9.245 8 February 2016 349,428 100% Warren East (retired 30 June 2013) LTIP 100% of salary 8 February 2013 54,083 9.245 8 February 2016 1,000,000 50% 50% of bonus Warren East paid in respect (retired 30 June 2013) DAB of 2012 8 February 2013 33,677 9.245 8 February 2016 622,617 100% 50% of bonus Mike Inglis paid in respect (retired 31 March 2013) DAB of 2012 8 February 2013 19,244 9.245 8 February 2016 355,781 100% * Face Value represents the maximum amount receivable under the award. ** Threshold for LTIP is 50% vest when certain TSR-related criteria are met. All DAB shares will vest after three years. Additional matching shares may be granted depending on EPS growth (see page 33 for details).

Details of options exercised by directors during the year are as follows:

Market price Exercise on date of Gains on Number price exercise exercise Director of shares £ £ £ Simon Segars 75,441 1.325 9.2168 595,362 Tim Score 114,959 1.325 9.2213 907,749 Mike Muller 80,830 1.325 9.2211 638,241 Warren East (retired 30 June 2013) 136,513 1.325 9.2943 1,087,911 Warren East (retired 30 June 2013) 4,620 1.948 8.745 31,402 Warren East (retired 30 June 2013) 141,133 1,119,313 Mike Inglis (retired 31 March 2013) 80,830 1.325 9.3014 644,736 Total 493,193 3,905,401

No options were exercised by directors after the year end. Except as described above, there have been no changes in directors’ interests under the Group’s equity schemes since the end of the 2013 financial year up to the date of approval of the Remuneration report. The Company’s register of directors’ interests contains full details of directors’ shareholdings and options to subscribe and conditional awards under the LTIP.

53 ARM Holdings plc Governance and Financial Report 2013

directors’ remuneration report (implementation) continued

Directors’ shareholdings in the Company There is no requirement in the Articles of Association for directors to hold shares in the Company. There is a requirement for executive directors to hold shares to the value of 200% of their salary as set out in the remuneration policy on page 34. The directors’ beneficial interests in the Company’s ordinary shares of 0.05 pence are as follows:

Shareholding at 31 December 2013 Shares held Shares held Shares held under Shareholding at or date of retirement Shareholding under LTIP at under DAB at SAYE scheme at date of report if earlier requirement met 31 December 2013 31 December 2013 31 December 2013 Director Number Number Number Number Number Number Sir John Buchanan – – N/A – – – Stuart Chambers (appointed 27 January 2014) 10,000 10,000 N/A – – – Simon Segars 557,222 479,947 Yes 136,887 81,823 – Tim Score 864,824 742,218 Yes 177,995 117,056 18,208 Mike Muller 1,425,442 1,340,774 Yes 122,614 79,975 – Andy Green – – N/A – – – Larry Hirst – – N/A – – – Eric Meurice (appointed 1 July 2013) – – N/A – – – Kathleen O’Donovan – – N/A – – – Janice Roberts – – N/A – – – Philip Rowley 40,000 40,000 N/A – – – Warren East (retired 30 June 2013) N/A 1,419,322 N/A – – – Mike Inglis (retired 31 March 2013) N/A 99,857 N/A – – –

The following information is unaudited. It is the Company’s policy to allow executive directors to hold non-executive positions at other companies and to receive remuneration for their services. The Board believes that experience of the operations of other companies and their boards and Committees is valuable to the development of the executive directors. Details of executive directors’ roles within other companies and their remuneration are as follows: Tim Score was a non-executive director of National Express Group plc until 25 February 2014 and he received remuneration totalling £60,500 up to 31 December 2013 (2012: £60,500). Mike Muller is a non-executive director of Intelligent Energy Limited in July 2012 and he received fees totalling £40,000 up to 31 December 2013 (2012: £16,666 from appointment in July 2012). Warren East (who retired on 30 June 2013) is a non-executive director of De La Rue plc and he received remuneration totalling £26,100 up to the date of his retirement (2012: £49,000 for the full year). Mike Inglis (who retired on 31 March 2013) was a non-executive director of Pace plc and he received remuneration totalling £10,500 up to the date of his retirement. (2012: £42,000 for the full year). All of the executive directors are accruing benefits under a money purchase pension scheme as a result of their services to the Group. Contributions to the scheme or the alternative cash allowance as described in the Pensions section above were fully paid during the year. The Directors’ Remuneration Report was approved by a duly authorised Committee of the Board and signed on its behalf by

Philip Rowley Remuneration Committee Chairman (until 31 December 2013) 5 March 2014

54 Governance Financial Report

Independent Auditors’ Report to the Members of ARM Holdings plc

Report on the Group financial statements Our opinion In our opinion the Group financial statements, defined below: • give a true and fair view of the state of the Group’s affairs as at 31 December 2013 and of its profit and cash flows for the year then ended; • have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union; and • have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the IAS Regulation. This opinion is to be read in the context of what we say in the remainder of this report. What we have audited The Group financial statements, which are prepared by ARM Holdings plc, comprise: • the consolidated statement of financial position as at 31 December 2013; • the consolidated income statement and consolidated statement of comprehensive income for the year then ended; • the consolidated statement of changes in shareholders’ equity and consolidated cash flow statement for the year then ended; and • the notes to the Group financial statements, which include a summary of significant accounting policies and other explanatory information. The financial reporting framework that has been applied in the preparation of the Group financial statements comprises applicable law and IFRSs as adopted by the European Union. Certain disclosures required by the financial reporting framework have been presented elsewhere in the Annual Report and Accounts (the “Annual Report”), rather than in the notes to the financial statements. These are cross-referenced from the financial statements and are identified as audited. What an audit of financial statements involves We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) (“ISAs (UK & Ireland)”). An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: • whether the accounting policies are appropriate to the Group’s circumstances and have been consistently applied and adequately disclosed; • the reasonableness of significant accounting estimates made by the directors; and • the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report and Accounts (the “Annual Report”) to identify material inconsistencies with the audited Group financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

Overview of our audit approach Materiality We set certain thresholds for materiality. These helped us to determine the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and on the financial statements as a whole. Based on our professional judgement, we determined materiality for the Group financial statements as a whole to be £13.2 million. We based this assessment on the Group’s profit before exceptional items and taxation, being, in our view, the most relevant measure of performance of the Group. Materiality was calculated as 5% of this performance measure. We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £0.6 million as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons. Overview of the scope of our audit The Group financial statements are a consolidation of 27 companies, comprising the Group’s operating businesses and head office entities. Our Group audit focused on the two largest companies of the Group (ARM Limited and ARM Inc.) which contribute substantially all of the Group’s third party revenue and profits and more than 80% of the Group’s expenses and net assets. We performed full scope audit procedures at ARM Limited and ARM Inc. We also performed audit procedures over certain account balances and transaction classes at other Group companies Substantially all audit work in respect of the Group financial statements was performed by the Group engagement team, with the assistance of auditors from other PwC network firms in respect of specific account balances or transaction classes at some Group companies.

55 ARM Holdings plc Governance and Financial Report 2013

Independent Auditors’ Report to the Members of ARM Holdings plc continued

Areas of particular audit focus In preparing the financial statements, the directors made a number of subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. We primarily focused our work in these areas by assessing the directors’ judgements against available evidence, forming our own judgements, and evaluating the disclosures in the financial statements. In our audit, we tested and examined information, using sampling and other auditing techniques, to the extent we considered necessary to provide a reasonable basis for us to draw conclusions. We obtained audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both. We considered the following areas to be those that required particular focus in the current year. This is not a complete list of all risks or areas of focus identified by our audit. We discussed these areas of focus with the Audit Committee. Their report on those matters that they considered to be significant issues in relation to the financial statements is set out on page 15. Revenue recognition The timing of revenue recognition, particularly licence revenue, is inherently complex. Recognition of license revenue involves a number of significant judgements by the directors, including the following: • determining whether contracts contain deliverables which should be separated for revenue recognition purposes and the most appropriate revenue recognition methodology for those contracts; • determining the allocation of consideration on a fair value basis between components of multi-element contracts and whether the consideration is deemed probable where a contract incorporates extended payment terms; and • assessing the degree of completion of contracts accounted for on a ‘percentage of completion’ basis. (Refer also to note 1b to the Group financial statements.) In addition, ISAs (UK & Ireland) presume there is a risk of fraud in revenue recognition for every audit conducted under these auditing standards because of the pressure management may feel to achieve the planned results. How the scope of our audit addressed the area of focus We evaluated the relevant IT systems and tested the internal controls over the completeness, accuracy and timing of revenue recognised. We read a sample of contracts selected on a high value basis and assessed whether the revenue recognition methodology is consistent with accounting standards. We evaluated the significant judgements and estimates made by management in applying the Group’s policy to specific contracts and obtained evidence, including contractual agreements, delivery records, cash receipts and project plans. For the contracts selected we re-performed management’s calculations and agreed the revenue recognised to the underlying accounting records. In response to the presumed risk of fraud, where revenue was recorded through journal entries we performed testing over a sample of journals to establish whether revenue was appropriately recognised. Litigation and accounting for responses to Intellectual Property (‘IP’) risk The Group has, directly and through indemnity provisions in its contracts with customers, exposure to patent infringement disputes. Judgements are made in determining the extent and amount of any provisions. In addition, the Group has engaged in arrangements to obtain IP rights, and judgements are made in determining the most appropriate accounting treatment in this regard. How the scope of our audit addressed the area of focus We discussed litigation with the Group’s in-house legal counsel and obtained confirmations from external legal advisors. We assessed the adequacy of any provisions recognised and disclosures made in the Group financial statements. We examined the Group’s arrangements in response to litigation and IP risk and considered their accounting treatment. Where indemnification costs with a licensee and litigation settlements through purchase of a licence were expensed during the year, we vouched to evidence of payment and examined relevant contracts. In respect of ARM’s contribution to a consortium to acquire rights over the patents of MIPS Technologies Inc., we evaluated the accounting treatment adopted and considered the assumptions made in valuing the available-for-sale asset acquired and its subsequent impairment. We also examined evidence demonstrating the future use of the patents acquired in ARM’s roadmap and assessed the assumptions used that support the carrying value in the balance sheet.

56 Governance Financial Report

Goodwill impairment assessment The assessment of the value in use of the Physical Intellectual Property Division (‘PIPD’) for the purpose of assessing whether the carrying value of goodwill is impaired involves significant judgement from the directors. These judgements include estimates of the projected future results of PIPD and the allocation of revenue to PIPD from the Processor Division (‘PD’) to reflect an estimate of the arm’s length incremental benefit accruing to PD from PIPD activity. (Refer also to note 13 to the Group financial statements.) How the scope of our audit addressed the area of focus We reviewed the methodology used in the directors’ cash flow projections, and the process by which they were drawn up, including reconciling them to the latest Board-approved budgets, and testing the accuracy of the underlying calculations. We challenged: • the estimates underlying the allocation of revenues from PD to PIPD by assessing the historical and projected growth in POP IP and the reasonableness of the proportion of this revenue allocated to PIPD; • the directors’ key assumptions for long term growth rates in the forecasts by comparing them to external analysts’ and industry expert forecasts; and • the discount rate by comparing to our own estimate of the cost of capital for the company. We also performed sensitivity analysis around the key drivers: including the cross-allocation of revenues to PIPD from other divisions of the ARM group, and the growth and discount rates used within the cash flow forecasts. Risk of management override of internal controls ISAs (UK & Ireland) require that we consider this. How the scope of our audit addressed the area of focus We assessed the overall control environment of the Group, including the arrangements for staff to “whistle-blow” inappropriate actions, and interviewed senior management and the Group’s internal audit function. We examined the significant accounting estimates and judgements relevant to the financial statements for evidence of bias by management. In particular, we challenged management over the estimates and judgements made in respect of the annual goodwill impairment review and revenue recognition. We also performed testing over manual journal entries.

Going Concern Under the Listing Rules we are required to review the directors’ statement, set out on page 23, in relation to going concern. We have nothing to report having performed our review. As noted in the directors’ statement, the directors have concluded that it is appropriate to prepare the Group’s financial statements using the going concern basis of accounting. The going concern basis presumes that the Group has adequate resources to remain in operation, and that the directors intend it to do so, for at least one year from the date the financial statements were signed. As part of our audit we have concluded that the directors’ use of the going concern basis is appropriate. However, because not all future events or conditions can be predicted, these statements are not a guarantee as to the Group’s ability to continue as a going concern.

Opinion on matters prescribed by the Companies Act 2006 In our opinion: • the information given in the Strategic Report and the Directors’ Report for the financial year for which the Group financial statements are prepared is consistent with the Group financial statements.

57 ARM Holdings plc Governance and Financial Report 2013

Independent Auditors’ Report to the Members of ARM Holdings plc continued

Other matters on which we are required to report by exception Adequacy of information and explanations received Under the Companies Act 2006 we are required to report to you if, in our opinion we have not received all the information and explanations we require for our audit. We have no exceptions to report arising from this responsibility. Directors’ remuneration Under the Companies Act 2006 we are required to report if, in our opinion, certain disclosures of directors’ remuneration specified by law have not been made, and under the Listing Rules we are required to review certain elements of the report to shareholders by the Board on directors’ remuneration. We have no exceptions to report arising from these responsibilities. Corporate Governance Statement Under the Listing Rules we are required to review the part of the Corporate Governance Statement relating to the Company’s compliance with nine provisions of the UK Corporate Governance Code (‘the Code’). We have nothing to report having performed our review. On page 15 of the Annual Report, as required by the Code Provision C.1.1, the directors state that they consider the Annual Report taken as a whole to be fair, balanced and understandable and provides the information necessary for members to assess the Group’s performance, business model and strategy. On page 15, as required by C3.8 of the Code, the Audit Committee has set out the significant issues that it considered in relation to the financial statements, and how they were addressed. Under ISAs (UK & Ireland) we are required to report to you if, in our opinion: • the statement given by the directors is materially inconsistent with our knowledge of the Group acquired in the course of performing our audit; or • the section of the Annual Report describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee. We have no exceptions to report arising from this responsibility.

Other information in the Annual Report Under ISAs (UK & Ireland), we are required to report to you if, in our opinion, information in the Annual Report is: • materially inconsistent with the information in the audited Group financial statements; or • apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in the course of performing our audit; or • is otherwise misleading. We have no exceptions to report arising from this responsibility.

58 Governance Financial Report

Responsibilities for the financial statements and the audit Our responsibilities and those of the directors As explained more fully in the directors’ Responsibilities Statement, the directors are responsible for the preparation of the Group financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the Group financial statements in accordance with applicable law and ISAs (UK & Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

Other matter We have reported separately on the parent company financial statements of ARM Holdings plc for the year ended 31 December 2013 and on the information in the Directors’ Remuneration Report that is described as having been audited.

Charles Bowman Senior Statutory Auditor for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 5 March 2014

59 ARM HOLDINGS PLC Governance and Financial Report 2013

Consolidated income statement

2013 2012 For the year ended 31 December Note £m £m Revenues 2 714.6 576.9 Cost of revenues (39.3) (31.9) Gross profit 675.3 545.0 Operating expenses Research and development (202.9) (166.3) Sales and marketing (89.4) (72.9) General and administrative (128.2) (97.7) Total operating expenses before exceptional items (420.5) (336.9) Exceptional items 6 (101.3) – Total operating expenses after exceptional items (521.8) (336.9) Profit from operations 153.5 208.1 Investment income 13.3 13.9 Interest payable and similar charges (0.2) (0.3) Share of results in joint venture 26 (4.0) (0.7) Profit before tax 2, 5 162.6 221.0 Tax (including £8.6 million in respect of exceptional items) 7 (57.8) (60.3) Profit for the year 2 104.8 160.7 Earnings per share Basic and diluted earnings 104.8 160.7 Number of shares (millions) Basic weighted average number of shares 1,396.4 1,375.1 Effect of dilutive securities: Employee incentive schemes 15.4 20.7 Diluted weighted average number of shares 1,411.8 1,395.8 Basic EPS 7.5p 11.7p Diluted EPS 7.4p 11.5p All the profit for the year is attributable to the owners of the Company and all activities relate to continuing operations. The Company has opted to present its own accounts under UK GAAP as shown on pages 109 to 114. Details of dividends paid and proposed are in notes 8 and 25 of the financial statements respectively.

Consolidated statement of comprehensive income

2013 2012 For the year ended 31 December Note £m £m Profit for the year 104.8 160.7 Other comprehensive income: Unrealised holding loss on available-for-sale financial assets (net of tax of £nil (2012: £0.1m)) * 11 – (0.3) Currency translation adjustment * (17.9) (26.8) Other comprehensive loss for the year (17.9) (27.1) Total comprehensive income for the year 86.9 133.6 *These items may be reclassified to the income statement if certain conditions are met. The accompanying notes are an integral part of the financial statements.

60 Governance Financial Report

Consolidated balance sheet

2013 2012 At 31 December Note £m £m Assets Current assets: Cash and cash equivalents 17 43.8 46.3 Short-term deposits 17 544.1 340.0 Fair value of currency exchange contracts 17 5.1 1.4 Accounts receivable 9 136.2 124.5 Available-for-sale financial assets 11, 17 1.2 – Prepaid expenses and other assets 10 39.8 135.6 Current tax assets 6.9 13.9 Inventories 3.0 2.3 Total current assets 780.1 664.0 Non-current assets: Long-term deposits 17 125.6 141.3 Loans and receivables 17 3.0 2.1 Available-for-sale financial assets 11, 17 13.9 13.8 Investment in joint venture 26 6.5 6.8 Prepaid expenses and other assets 10 1.6 2.0 Property, plant and equipment 12 33.6 36.1 Goodwill 13 525.9 519.4 Other intangible assets 14 82.9 11.2 Deferred tax assets 7 65.3 70.1 Total non-current assets 858.3 802.8 Total assets 1,638.4 1,466.8 Liabilities Current liabilities: Accounts payable 17 7.0 5.9 Embedded derivatives 17 7.0 2.5 Accrued and other liabilities 15 88.1 79.3 Finance lease liabilities 16 2.7 2.9 Current tax liabilities 18.8 16.6 Deferred revenue 156.7 126.4 Total current liabilities 280.3 233.6 Non-current liabilities: Accrued and other liabilities 15 2.6 – Finance lease liabilities 16 1.5 2.9 Deferred tax liabilities 7 0.1 – Deferred revenue 42.5 24.2 Total non-current liabilities 46.7 27.1 Total liabilities 327.0 260.7 Net assets 1,311.4 1,206.1 Capital and reserves attributable to owners of the Company Share capital 18 0.7 0.7 Share premium account 18.1 12.2 Capital reserve 354.3 354.3 Share option reserve 61.4 61.4 Retained earnings 820.6 703.3 Cumulative translation adjustment 56.3 74.2 Total equity 1,311.4 1,206.1 The accompanying notes are an integral part of the financial statements. The financial statements on pages 60 to 108 were approved by the Board of directors on 5 March 2014 and were signed on its behalf by: Simon Segars, Chief Executive Officer Tim Score, Chief Financial Officer

61 ARM HOLDINGS PLC Governance and Financial Report 2013

Consolidated cash flow statement

2013 2012 For the year ended 31 December Note £m £m Profit before tax 162.6 221.0 Investment income (net of interest payable and similar charges) (13.1) (13.6) Share of results in joint venture 4.0 0.7 Profit from operations 153.5 208.1 Adjustments for: Depreciation and amortisation of property, plant and equipment and intangible assets 28.0 17.4 Compensation charge in respect of share-based payments 59.2 37.1 Provision for impairment of available-for-sale financial assets (including non-cash exceptional item of £59.5 million) 66.3 1.4 Profit on disposal of available-for-sale financial assets (3.3) (0.8) Loss on disposal of property, plant and equipment 0.6 – Provision for doubtful debts 4.0 0.4 Non-cash foreign currency gains (3.6) (0.7) Movement in fair value of currency exchange contracts (3.7) (2.9) Movement in fair value of embedded derivatives 4.4 3.7 Changes in working capital Accounts receivable (19.8) (5.7) Inventories (0.7) 0.1 Prepaid expenses and other assets (8.8) (1.1) Accounts payable 1.1 (2.8) Deferred revenue 53.1 37.3 Accrued and other liabilities 8.3 (4.8) Cash generated by operations before tax 338.6 286.7 Income taxes paid (23.3) (26.1) Net cash from operating activities 315.3 260.6 Investing activities Interest received (net of interest paid of £0.2m (2012: £0.3m)) 13.2 11.2 Purchases of property, plant and equipment (13.5) (20.2) Advance payment to acquire intangible asset and available-for-sale financial asset 10 – (103.7) Purchases of other intangible assets (31.8) (5.4) Purchases of available-for-sale financial assets 11 (8.9) (3.0) Proceeds on disposal of available-for-sale financial assets 5.5 11.8 Purchase of short- and long-term deposits, net (188.5) (76.8) Purchase of subsidiaries, net of cash and borrowings acquired 19 (21.1) – Investment in joint venture 26 (3.7) (7.5) Provision of long-term loan (0.7) – Net cash used in investing activities (249.5) (193.6) Financing activities Proceeds from borrowings – 99.8 Proceeds received on issuance of shares 18 5.9 5.6 Refund of costs related to share issue – 2.7 Dividends paid to shareholders 8 (68.9) (51.8) Repayment of borrowings (1.1) (99.8) Repayment of finance lease liabilities (3.3) (3.3) Net cash used in financing activities (67.4) (46.8) Net (decrease)/increase in cash and cash equivalents (1.6) 20.2 Cash and cash equivalents at beginning of the year 46.3 26.8 Effect of foreign exchange rate changes (0.9) (0.7) Cash and cash equivalents at end of the year 43.8 46.3 The accompanying notes are an integral part of the financial statements. 62 Governance Financial Report

Consolidated statement of changes in shareholders’ equity

Attributable to the owners of the Company Share Share Cumulative Share premium Capital option Retained Revaluation translation capital account reserve* reserve** earnings reserve*** adjustment Total For the year ended 31 December £m £m £m £m £m £m £m £m Balance at 1 January 2012 0.7 6.6 351.6 61.4 539.6 0.3 101.0 1,061.2 Profit for the year – – – – 160.7 – – 160.7 Other comprehensive income: Unrealised holding loss on available-for-sale financial assets (net of tax of £0.1 million) – – – – – (0.3) – (0.3) Currency translation adjustment – – – – – – (26.8) (26.8) Total comprehensive income for the year – – – – 160.7 (0.3) (26.8) 133.6 Shares issued on exercise of share options and awards (note 18) – 5.6 – – – – – 5.6 Dividends (note 8) – – – – (51.8) – – (51.8) Credit in respect of employee share schemes – – – – 37.1 – – 37.1 Movement on tax arising on share options and awards – – – – 17.7 – – 17.7 Refund of costs related to share issue **** – – 2.7 – – – – 2.7 – 5.6 2.7 – 3.0 – –11.3 Balance at 31 December 2012 0.7 12.2 354.3 61.4 703.3 – 74.2 1,206.1 Profit for the year – – – – 104.8 – – 104.8 Other comprehensive income: Currency translation adjustment – – – – – – (17.9) (17.9) Total comprehensive income for the year – – – – 104.8 – (17.9) 86.9 Shares issued on exercise of share options and awards (note 18) – 5.9 – – – – – 5.9 Dividends (note 8) – – – – (68.9) – – (68.9) Credit in respect of employee share schemes – – – – 59.2 – – 59.2 Movement on tax arising on share options and awards – – – – 22.2 – – 22.2 – 5.9 – – 12.5 – – 18.4 Balance at 31 December 2013 0.7 18.1 354.3 61.4 820.6 – 56.3 1,311.4 * Capital reserve. In 2004, the premium on the shares issued in part consideration for the acquisition of Artisan Components Inc. was credited to reserves on consolidation in accordance with Section 131 of the Companies Act 1985. The reserve has been classified as a capital reserve to reflect the nature of the original credit to equity arising on acquisition. ** Share option reserve. This represents the fair value of options granted on the acquisition of Artisan Components Inc. in 2004. *** Revaluation reserve. The Group includes on its balance sheet equity investments that are not publicly traded, which are classified as available-for-sale financial assets. These are carried at fair value plus transaction costs. Unrealised holding gains or losses on such investments are included, net of related taxes, within the revaluation reserve (except where there is evidence of permanent impairment, in which case losses would be recognised within the income statement). Any unrealised gains within this reserve are undistributable. **** Refund of costs related to share issue. This represents the refund of stamp duty costs incurred on the issue of shares for the acquisition of Artisan Components Inc. in 2004.

The accompanying notes are an integral part of the financial statements.

63 ARM HOLDINGS PLC Governance and Financial Report 2013

Notes to the financial statements

1 The Group and a summary of its significant accounting policies and financial risk management 1a General information about the Group The business of the Group ARM Holdings plc and its subsidiary companies (“ARM” or “the Group”) design microprocessors, physical IP and related technology and software, and sell development tools, to enhance the performance, cost-effectiveness and energy-efficiency of high-volume embedded applications. The Group licenses and sells its technology and products to leading international electronics companies, which in turn manufacture, market and sell microcontrollers, application-specific integrated circuits (ASICs) and application-specific standard processors (ASSPs) based on ARM’s technology to systems companies for incorporation into a wide variety of end products. By creating a network of Partners, and working with them to best utilise ARM’s technology, the Group is establishing its processor architecture and physical IP for use in many high-volume embedded microprocessor applications, including mobile phones, tablets, digital televisions and PC peripherals, enterprise networking and servers, and smart cards and microcontrollers. The Group also licenses and sells development tools direct to systems companies and provides support services to its licensees, systems companies and other systems designers. The Group’s principal geographic markets are Europe, the US and Asia Pacific. Incorporation and history ARM is a public limited company incorporated and domiciled under the laws of England and Wales. The registered office of the Company is 110 Fulbourn Road, Cambridge, CB1 9NJ, UK. The Company was formed on 16 October 1990, as a joint venture between Apple Computer (UK) Limited and Acorn Computers Limited, and operated under the name Advanced RISC Machines Holdings Limited until 10 March 1998, when its name was changed to ARM Holdings plc. Its initial public offering was on 17 April 1998. Group undertakings include ARM Limited (incorporated in the UK), Geomerics Limited (incorporated in the UK), ARM France SAS (incorporated in France), ARM Germany GmbH (incorporated in Germany), ARM Norway AS (incorporated in Norway), ARM Sweden AB (incorporated in Sweden), ARM Finland Oy (incorporated in Finland), ARM Inc. (incorporated in the US), ARM Consulting (Shanghai) Co. Limited (incorporated in PR China), ARM KK (incorporated in Japan), ARM Korea Limited (incorporated in South Korea), ARM Taiwan Limited (incorporated in Taiwan), and ARM Embedded Technologies Pvt. Limited (incorporated in India). 1b Summary of significant accounting policies The principal accounting policies applied in the presentation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. Basis of preparation These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), as adopted by the EU, IFRIC interpretations and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared on a going concern basis and in accordance with the historical cost convention as modified by: the revaluation to fair value of available-for-sale financial assets; financial assets and liabilities at fair value through the income statement (including embedded derivatives and derivative instruments). The cash flow statement for 2012 includes a reclassification in respect of the advance payment to acquire rights to MIPS Technologies, Inc.’s portfolio of patents. £103.7 million has been moved from ‘prepayments and other assets’ within working capital movements to ‘advance payment to acquire intangible asset and available-for-sale (AFS) financial asset’ within investing activities. The reclassification has been made to better reflect the nature of the payment following the completion of the transaction in 2013. Critical accounting estimates and judgements The preparation of financial statements in accordance with IFRS requires the directors to make critical accounting estimates and judgements that affect the amounts reported in the financial statements and accompanying notes. These estimates and judgements are continually evaluated and are based on historical experiences and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

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1b Summary of significant accounting policies continued Critical accounting estimates and judgements continued Impairment of goodwill The Group tests goodwill for impairment at least annually. This requires an estimation of the value in use of the cash generating units (CGUs) to which goodwill is allocated. As discussed in detail in note 13, estimating the value in use requires the Group to make an estimate of the expected future cash flows from the CGUs and also to choose a suitable discount rate in order to calculate the present values of those cash flows. The discount rate is based on an estimate of the Group’s weighted average cost of capital. The Group uses a post-tax discount rate of 10% (2012: 10%) (pre-tax discount rate of approximately 11% (2012: 11%)). The most significant balance of goodwill is that allocated to the Physical IP Division (PIPD). The cash flows relevant to this CGU are those of both the division itself and also a proportion of the cash flows generated by the Processor Division (PD). The directors make an estimate of the PD cash flows that are considered to be generated as a result of the incremental value provided by the combination of PD and PIPD products. Although these PD cash flows are not cross allocated to PIPD in the segmental reporting note, the directors consider that it is necessary to include them in the estimation of the value in use of the PIPD CGU. This is because PD products are enhanced when combined with certain PIPD products. As a result the directors believe that PD is able, and will be able in future, to achieve higher revenues than it would have done as a stand-alone entity. The amount of these revenues is estimated by considering the percentage of revenue that is achieved as a result of the combination for each class of PD product. While these percentages are not derived from external sources of information, as no such sources exist, the directors utilise their considerable knowledge and experience of the semiconductor industry in estimating the amounts that would be re-charged if PD and PIPD were independent entities. Among other things, they consider the number of additional licences that may be signed and the additional value that may be achieved per licence as a result of the processors’ enhanced performance. Revenue recognition The Group makes significant estimates in applying its revenue recognition policies. In particular, as discussed in detail in the revenue recognition policy on page 68, estimates are made in relation to the use of the percentage-of-completion accounting method, which requires that the extent of progress toward completion of contracts can be anticipated with reasonable certainty. The use of the percentage-of-completion method is itself based on the assumption that, at the outset of licence agreements, there is an insignificant risk that customer acceptance is not obtained. The Group also makes assessments, based on prior experience, of the extent to which future milestone receipts represent a probable future economic benefit to the Group. In addition, when allocating revenue to various components of arrangements involving several components, it is assumed that the fair value of each element is reflected by its price when sold separately. The complexity of the estimation process and issues related to the assumptions, risks and uncertainties inherent with the application of the revenue recognition policy affect the amounts reported in the financial statements. If different assumptions were used, it is possible that different amounts would be reported in the financial statements. Provisions for income taxes The Group is subject to income taxes in numerous jurisdictions. Significant judgement is required in determining the world-wide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made. Legal settlements and other contingencies Determining the amount to be accrued for legal settlements requires the directors to estimate the committed future legal and settlement fees the Group is expecting to incur, either where suits are filed against the Group for infringement of patents, or where the Group may be required to indemnify a licensee. The directors assess the extent of any potential infringement based on legal advice and written opinions received from external counsel and then estimate the level of accrual required. Contingent consideration for an acquisition is recognised at fair value as part of the purchase consideration if the contingent conditions are expected to be satisfied. This requires the directors to estimate the acquiree’s future financial performance, typically more than one year post- acquisition.

65 ARM HOLDINGS PLC Governance and Financial Report 2013

Notes to the financial statements continued

1b Summary of significant accounting policies continued Critical accounting estimates and judgements continued Participation in trust to acquire patent rights During 2013, the Group has participated in a consortium, via a trust, to acquire certain patent rights and has made various judgements regarding these transactions. The directors believe that the Group does not control or have significant influence over the trust since, amongst other factors it does not have voting rights on the board or significant influence over the relevant activities of the trust. The results of the trust have therefore not been consolidated or equity accounted in the Group financial statements. The Group has determined that the participation in the consortium conferred on the Group two separate rights: an intangible asset, conferring the right to use the assets in the Group’s own business, and an AFS financial asset conferring the right to certain potential future revenue streams arising from the licensing activities of the trust. The amount expected to be recovered through this licensing programme was estimated by the Group in conjunction with the management of the trust, which has considerable experience of managing the assets of similar trusts. The Group assesses its intangible assets for impairment at each reporting date and has reviewed the valuation of the patent rights acquired in this transaction. Given the design freedom that these rights provide and the size of the future opportunity afforded, the directors have concluded that no impairment of the patent rights is required. In Q4 2013, the trust made a strategic decision not to pursue a licensing programme and the portfolio was instead put up for sale by auction. The Group acquired the patents in January 2014 for $4.0 million (£2.4 million), which will be accounted for as an additional intangible asset. The auction process means that there are no further potential cash flows in relation to the AFS financial asset and the asset has therefore been impaired down to the value of the Group’s share of the auction proceeds, resulting in a non-cash exceptional charge of $98.5 million (£59.5 million). Provision for impairment of trade receivables The Group assesses trade receivables for impairment which requires the directors to estimate the likelihood of payment forfeiture by customers.

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1b Summary of significant accounting policies continued New standards, amendments and interpretations New and amended standards adopted by the Group IFRS 10 “Consolidated financial statements” IFRS 10 replaces the guidance on control and consolidation in IAS 27 “Consolidated and separate financial statements”, and SIC-12 “Consolidation – special purpose entities” and changes the definition of control so that the same criteria are applied to all entities. The revised definition of control focuses on the need to have both power and variable returns before control is present. Power is the current ability to direct the activities that significantly influence returns. Returns must vary and can be positive, negative or both. This standard has not had a material impact on the results of the Group. The standard is effective for annual periods beginning on or after 1 January 2014 but has been early adopted by the Group. IFRS 11 “Joint arrangements” Changes in the definitions have reduced the “types” of joint arrangements to two: joint operations and joint ventures. The existing policy choice of proportionate consolidation for jointly controlled entities has been eliminated. Equity accounting is mandatory for participants in joint ventures. Entities that participate in joint operations will follow accounting much like that for joint assets or joint operations today, whereby a joint operator will recognise its interest based on its involvement in the joint operation (that is, based on its direct rights and obligations) rather than on the participation interest it has in the joint arrangement. In contrast, a joint venture does not have rights to individual assets or obligations for individual liabilities of the joint venture. Instead, joint venturers share in the net assets and, in turn, the outcome (profit or loss) of the activity undertaken by the joint venture. This standard has not had a material impact on the results of the Group. This standard is effective for annual periods beginning on or after 1 January 2014 but has been early adopted by the Group. IFRS 12 “Disclosure of interests in other entities” IFRS 12 sets out the required disclosures for entities reporting under the two new standards, IFRS 10 “Consolidated financial statements”, and IFRS 11 “Joint arrangements”. The new standard, IFRS 12, requires entities to disclose information that helps financial statement readers to evaluate the nature, risks and financial effects associated with the entity’s interests in subsidiaries, associates, joint arrangements and unconsolidated structured entities. This standard has not had a material impact on the results of the Group. The standard is effective for annual periods beginning on or after 1 January 2014 but has been early adopted by the Group. IFRS 13 “Fair value measurement” The requirements do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards. IFRS 13 aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRSs. The standard is effective for annual periods beginning on or after 1 January 2013 and was endorsed by the EU in December 2012. The Group has included the relevant disclosure requirements within note 1c ‘Financial risk management’, and note 17 ‘Financial instruments’. IAS 28 (Revised) “Investments in associates and joint ventures” IAS 28 defines “significant influence” and the “equity method” and provides guidance on their practical application. The revised standard incorporates the accounting for joint ventures as well as the consensus from SIC-13 “Jointly controlled entities”. The disclosure requirements have now been relocated to IFRS 12. This new guidance may impact the classification of investments acquired in the future. This standard is effective for annual periods beginning on or after 1 January 2014 but has been early adopted by the Group. Amendment to IAS 1 “Financial statement presentation” The main change resulting from this amendment is a requirement for entities to group items presented in other comprehensive income (OCI) on the basis of whether they are potentially reclassifiable to the income statement subsequently (reclassification adjustments). This standard is effective for accounting periods beginning on or after 1 July 2012 and was endorsed by the EU in June 2012. The Group has included relevant disclosures within the financial statements. IAS 27 (revised 2011) “Separate financial statements” This standard includes the provisions on separate financial statements that are left after the control provisions of IAS 27 have been included in the new IFRS 10. This standard is effective for accounting periods beginning on or after 1 January 2014 but has been early adopted by the Group. There has been no material impact on the Group. Amendment to IAS 36 “Impairment of assets” This amendment relates to the recoverable amount disclosures for non-financial assets. The amendment removes certain disclosures of the recoverable amount of CGUs that had been included in IAS 36 by the issue of IFRS 13. The amendment is effective for accounting periods beginning on or after 1 January 2014 but has been early adopted by the Group.

67 ARM HOLDINGS PLC Governance and Financial Report 2013

Notes to the financial statements continued

1b Summary of significant accounting policies continued New standards, amendments and interpretations continued Standards, amendments and interpretations that are not yet effective and have not been early adopted IFRS 9 “Financial instruments” addresses the classification and measurement of financial assets and financial liabilities. This is the first part of a new standard to replace IAS 39. IFRS 9 has two measurement categories: amortised cost and fair value. All equity instruments are measured at fair value. A debt instrument is measured at amortised cost only if the entity is holding it to collect contractual cash flows and the cash flows represent principal and interest. Otherwise it is measured at fair value through the income statement. This standard is not expected to have a material impact on the results of the Group. Published by the IASB in November 2009, the effective date is currently open, pending the finalisation of the impairment, and classification and measurement requirements. This standard is not yet endorsed by the EU. Amendment to IAS 32 “Financial instruments: Presentation” This amendment updates the application guidance in IAS 32 to clarify some of the requirements for offsetting financial assets and financial liabilities on the balance sheet. This standard is effective for accounting periods beginning on or after 1 January 2014 and was endorsed by the EU in December 2012. It is not expected to have a material impact on the Group. Revenue recognition The Group follows the principles of IAS 18, “Revenue recognition”, in determining appropriate revenue recognition policies. In principle, therefore, revenue associated with the sale of goods is recognised when all of the following conditions have been satisfied: • The Group has transferred to the buyer the significant risks and rewards of ownership of the goods. • The Group does not retain either continuing managerial involvement to the degree usually associated with ownership or effective control over the goods sold. • The amount of revenue can be measured reliably. • It is probable that the economic benefits associated with the transaction will flow to the Group. • The costs incurred or to be incurred in respect of the sale can be measured reliably. Revenue associated with the rendering of services is recognised when all of the following conditions have been satisfied: • The amount of revenue can be measured reliably. • It is probable that the economic benefits associated with the transaction will flow to the Group. • The stage of completion of the transaction at the end of the reporting period can be measured reliably. • The costs incurred for the transaction and the costs to complete the transaction can be measured reliably. Revenue is shown net of value added tax, returns, rebates and discounts, and after eliminating sales within the Group. Revenue comprises the value of sales of licences to ARM technology, royalties arising from the resulting sale of licensees’ ARM technology-based products, revenues from support, maintenance and training and the sale of development boards and software toolkits. Licence revenues: Revenue from standard licence products that are not modified to meet the specific requirements of each customer is recognised when all of the conditions relevant to revenue associated with the sale of goods have been satisfied: • The significant risks and rewards of ownership are transferred when a licence arrangement has been agreed and the IP has been delivered to the customer. • Continuing managerial involvement and effective control over licensed IP is relinquished at the point at which the IP is delivered to the customer. • The amount of revenue can be measured reliably; any consideration due under the licensing arrangement that is not deemed to be reliably measurable is deferred until it can be measured reliably. • It is probable that the economic benefits associated with the transaction will flow to the Group; any economic benefits of the transaction that are deemed unlikely to flow to the Group are deferred until it becomes probable that they will flow to the Group.

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1b Summary of significant accounting policies continued Revenue recognition continued The majority of the Group’s revenues come from the licensing of IP and subsequent receipt of royalty revenues and there are therefore very few direct costs associated with the sale of goods; where there are direct costs of revenues, these are measured with reference to the purchasing agreements in place with the Group’s suppliers. Many licence agreements are for products which are designed to meet the specific requirements of each customer. Revenue from the sale of such licences is recognised on a percentage-of-completion basis over the period from signing of the licence to customer acceptance. Under the percentage-of-completion method, provisions for estimated losses on uncompleted contracts are recognised in the period in which the likelihood of such losses is determined. The percentage-of-completion is measured by monitoring progress using records of actual time incurred to date in the project compared with the total estimated project requirement, which approximates to the extent of performance. Where invoicing milestones in licence arrangements are such that the receipts fall due significantly outside the period over which the customisation is expected to be performed or significantly outside its normal payment terms for standard licence arrangements, the Group evaluates whether it is probable that economic benefits associated with these milestones will flow to the Group and therefore whether these receipts should initially be included in the arrangement consideration. In particular, it considers: • whether there is sufficient certainty that the invoice will be raised in the expected timeframe, particularly where the invoicing milestone is in some way dependent on customer activity; • whether it has sufficient evidence that the customer considers that the Group’s contractual obligations have been, or will be, fulfilled; • whether there is sufficient certainty that only those costs expected to be incurred will indeed be incurred before the customer will accept that a future invoice may be raised; • the extent to which previous experience with similar product groups and similar customers supports the conclusions reached. Where the Group considers that there is insufficient evidence that it is probable that the economic benefits associated with such future milestones will flow to the Group, taking into account these criteria, such milestones are excluded from the arrangement consideration until there is sufficient evidence that it is probable that the economic benefits associated with the transaction will flow to the Group. The Group does not discount future invoicing milestones, as the effect of so doing would be immaterial. Where agreements involve several components, the entire fee from such arrangements is allocated to each of the individual components based on each component’s fair value, where fair value is the price that is regularly charged for an item when sold separately. Where a component in a multiple-component agreement has not previously been sold separately, the assessment of fair value for that component is based on other factors including, but not limited to, the price charged when it was sold alongside other items and the book price of the component relative to the book prices of the other components in the agreement. If fair value of one or more components in a multiple-component agreement is not determinable (where such component is not considered incidental to the overall arrangement), the entire arrangement fee is deferred until such fair value is determinable, or the component has been delivered to the licensee. Where, in substance, two or more elements of a contract are linked and fair values cannot be allocated to the individual components, the revenue recognition criteria are applied to the elements as if they were a single element. Agreements including rights to unspecified future products (as opposed to unspecified upgrades and enhancements) are accounted for using subscription accounting, with revenue from the arrangement being recognised on a straight-line basis over the term of the arrangement, or an estimate of the economic life of the products offered if no term is specified, beginning with the delivery of the first product. Royalty revenues: Royalty revenues are earned on sales by the Group’s customers of products containing ARM technology. Royalty revenues are recognised when it is probable that the economic benefits associated with the transaction will flow to the Group, the amount of revenue can be reliably measured, and when the Group receives notification from the customer of product sales. Notification is typically received in the quarter following shipment of the products by the customer.

69 ARM HOLDINGS PLC Governance and Financial Report 2013

Notes to the financial statements continued

1b Summary of significant accounting policies continued Revenue recognition continued Other revenues: In addition to licence fees, contracts generally contain an agreement to provide post-delivery service support (in the form of support, maintenance and training) which consists of the right to receive services and/or unspecified product upgrades or enhancements that are offered on a when- and-if-available basis. Fees for post-delivery service support are generally specified in the contract. Revenue related to post-delivery service support is recognised based on fair value, which is determined with reference to contractual renewal rates. Where renewal rates are specified, revenue for post-delivery service support is recognised on a straight-line basis over the period for which support and maintenance is contractually agreed by the Group with the licensee. Sales of software, including development systems, which are not specifically designed for a given licence (such as off-the-shelf software) are recognised upon delivery, when the significant risks and rewards of ownership have been transferred to the customer. At that time, the Group has no further obligations except that, where necessary, the costs associated with providing post-delivery service support have been accrued. Services (such as training) that the Group provides which are not essential to the functionality of the IP are separately stated and priced in the contract and, therefore, accounted for separately. Revenue is recognised as services are performed and it is probable that the economic benefits associated with the transaction will flow to the Group. For all types of revenue, if the amount of revenue recognised exceeds the amounts invoiced to customers, the excess amount is recorded as amounts recoverable on contracts within accounts receivable. The excess of licence fees and post-delivery service support invoiced over revenue recognised is recorded as deferred revenue. Intangible assets (a) Goodwill Goodwill represents the excess of the fair value of the consideration paid on acquisition of a business over the fair value of the assets, including any intangible assets identified, and liabilities acquired. Goodwill is not amortised but is measured at cost less impairment losses. In determining the fair value of consideration, the fair value of equity issued is the market value of equity at the date of completion, the fair value of share options is calculated using the Black-Scholes valuation model, and the fair value of contingent consideration is based upon whether the directors believe any performance conditions will be met and thus whether any further consideration will be payable. (b) Other intangible assets Computer software, purchased patents and licences to use technology are capitalised at cost and amortised on a straight-line basis over an estimate of the time that the Group is expected to benefit from them. Costs that are directly attributable to the development of new business application software and that are incurred during the period prior to the date that the software is placed into operational use, are capitalised. External costs and internal costs are capitalised to the extent they enhance the future economic benefit of the asset. Although an independent valuation is made of any intangible assets purchased as part of a business combination, the directors are primarily responsible for determining the fair value of intangible assets. In-process research and development projects purchased as part of a business combination may meet the criteria set out in IFRS 3 (revised), “Business combinations”, for recognition as intangible assets other than goodwill. Management tracks the status of in-process research and development intangible assets such that their amortisation commences when the assets are brought into use. Order backlog is derecognised when it has been fully amortised. Amortisation is calculated so as to write off the cost of intangible assets, less their estimated residual values, which are adjusted (if appropriate) at each balance sheet date, on a straight-line basis over the expected useful economic lives of the assets concerned. The principal economic lives used for this purpose are: Computer software Three to five years Patents and licences Three to eleven years In-process research and development One to five years Developed technology One to seven years Existing agreements and customer relationships One to six years Core technology Five years Trademarks and tradenames One to five years Order backlog One year 70 Governance Financial Report

1b Summary of significant accounting policies continued Income taxes The current income tax charge is calculated on the basis of tax laws enacted or substantively enacted at the balance sheet date in the countries where the Group’s subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. During the period legislation was enacted to allow UK companies to elect for the Research and Development Expenditure Credit (RDEC) on qualifying expenditure incurred since 1 April 2013, instead of the existing super-deduction rules. At the balance sheet date management has concluded that the election will be made and therefore the RDEC is recorded as income included in profit before tax, netted against research and development expenses as the RDEC is of the nature of a government grant. In previous periods there was a reduction in the income tax expense. Deferred income taxes are computed using the liability method. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using enacted rates and laws that will be in effect when the differences are expected to reverse. The deferred tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred tax assets are recognised to the extent that it is probable that future taxable profits will arise against which the temporary differences will be utilised. Deferred tax is provided on temporary differences arising on investments in subsidiaries except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets and liabilities arising in the same tax jurisdiction are offset, where the taxation authority permits a single net payment. In the period a decision to elect into the UK patent box regime was made. The UK patent box regime seeks to tax all profits attributable to patented technology at a reduced rate of 10%. The rules are to be phased in over five years from 1 April 2013 – a company will be entitled to only 60% of the deduction in financial year 2013/14, rising to 100% by 2017/18. As ‘relevant’ patent box profits are taxed at 10% and other profits are taxed at UK statutory rates, deferred tax assets and liabilities are measured using the average rates expected to apply on realisation or settlement. In the UK and the US, the Group is entitled to a tax deduction for amounts treated as compensation on exercise of certain employee share options or vest of share awards under each jurisdiction’s tax rules. As explained under “Share-based payments” below, a compensation expense is recorded in the Group’s income statement over the period from the grant date to the vesting date of the relevant options and awards. As there is a temporary difference between the accounting and tax bases, a deferred tax asset is recorded. The deferred tax asset arising is calculated by comparing the estimated amount of tax deduction to be obtained in the future (based on the Company’s share price at the balance sheet date) with the cumulative amount of the compensation expense recorded in the income statement. If the amount of estimated future tax deduction exceeds the cumulative amount of the compensation expense at the statutory rate, the excess is recorded directly in equity, against retained earnings. Impairment of assets Non-financial assets that have an indefinite useful life, for example goodwill, are not subject to amortisation but are tested annually for impairment. Non-financial assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the non-financial asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value-in-use. For purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (each a cash generating unit, “CGU”). Where the recoverable amount of a CGU is measured based on a value-in-use calculation, all cash inflows and outflows associated with the CGU are taken into account whether these are explicitly charged or not. Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. The annual impairment tests in 2013 and 2012 showed there was no impairment with respect to goodwill. Furthermore, no trigger events have been identified that would suggest the impairment of any of the Group’s other intangible assets. The Group considers at each reporting date whether there is any indication that tangible fixed assets are impaired. If there is such an indication, the Group carries out an impairment test by measuring the assets’ recoverable amounts, which are the higher of the assets’ fair values less costs to sell and their values in use. If the recoverable amounts are less than the carrying amounts an impairment loss is recognised, and the assets are written down to their recoverable amounts.

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Notes to the financial statements continued

1b Summary of significant accounting policies continued Impairment of assets continued In the case of equity securities classified as AFS, a significant or prolonged decline in the fair value of the security below its cost is considered as an indicator that the securities are permanently impaired. If any such evidence exists for AFS financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any permanent impairment loss on that financial asset previously recognised in the income statement – is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments are not reversed. When securities classified as AFS are sold, the accumulated fair value adjustments recognised through other comprehensive income are recycled through the income statement. Impairment testing of trade receivables is described under “Accounts receivable” below. Provisions Provisions for legal claims are recognised when: the Group has a present legal or constructive obligation as a result of past events; and it is more likely than not that an outflow of resources will be required to settle the obligation; and the amount of the outflow can be reliably estimated. Exceptional items Exceptional items are disclosed separately in the financial statements where it is necessary to do so to provide further understanding of the financial performance of the Group. They are material items of income or expense that have been shown separately due to the significance of their nature. Segment reporting At 31 December 2013, the Group was organised on a world-wide basis into three business segments, namely the Processor Division (PD), the Physical IP Division (PIPD) and the System Design Division (SDD). This is based upon the Group’s internal organisation and management structure and is the primary way in which the Chief Operating Decision Maker (CODM) and the rest of the Board are provided with financial information. The directors believe that the CODM is the Chief Executive Officer of the Group. Segment expenses are expenses that are directly attributable to a segment together with the relevant portion of other expenses that can reasonably be allocated by segment. Foreign exchange gains or losses, investment income, interest payable and similar charges, share of joint venture results, and tax are not allocated by segment. Segment assets and liabilities include items that are directly attributable to a segment plus an allocation on a reasonable basis of shared items. Corporate assets and liabilities are not included in business segments and are thus unallocated. At 31 December 2013 and 2012, these comprised cash and cash equivalents, short- and long-term deposits, AFS financial assets, loans and receivables, embedded derivatives, and the fair value of currency exchange contracts. Current and deferred tax assets and liabilities and VAT are also not included in business segments and are thus unallocated. As part of the ongoing evolution of the business, the Group’s divisional structure was re-organised on 1 January 2014. As a result of this change, the Group’s business segments may change for future reporting periods in order to reflect this new organisation. Principles of consolidation The consolidated financial statements incorporate the financial statements of the Company and all its subsidiaries. Intra-group transactions, including sales, profits, receivables and payables, have been eliminated on consolidation. All subsidiaries use uniform accounting policies. • Business combinations The results of subsidiaries acquired are included in the income statement from the date of acquisition. Assets and liabilities existing at the date of acquisition are recorded at their fair values reflecting their condition at that date. Earn-outs paid as part of an acquisition are assessed on an individual basis and treated as either part of the acquisition consideration or as employee compensation depending on the nature of the agreement. • Subsidiaries Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.

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1b Summary of significant accounting policies continued Principles of consolidation continued • Associates Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting. Under the equity method, the investment is initially recognised at cost, and the carrying amount is increased or decreased to recognise the Group’s share of the profit or loss of the investee after the date of acquisition. • Joint ventures Joint ventures are all arrangements in which the Group has joint control with one or more other parties, whereby each party has a right to a share of the net assets of the arrangement. Investments in joint ventures are accounted for using the equity method of accounting. Under the equity method, the investment is initially recognised at cost, and the carrying amount is increased or decreased to recognise the Group’s share of the profit or loss of the investee after the date of acquisition. Research and development expenditure All ongoing research expenditure is expensed in the period in which it is incurred. Where a product is technically feasible, production and sale are intended, a market exists, expenditure can be measured reliably, and sufficient resources are available to complete the project, development costs are capitalised and amortised on a straight-line basis over the estimated useful life of the respective product. The Group believes its current process for developing products is essentially completed concurrently with the establishment of technological feasibility, which is evidenced by a working model. Accordingly, development costs incurred after the establishment of technological feasibility have not been significant and, therefore, no costs have been capitalised to date. Where no internally-generated intangible asset can be recognised, development expenditure is recognised as an expense in the period in which it is incurred. Any collaborative agreement whereby a third party agrees to partially fund the Group’s research and development is recognised over the period of the agreement as a credit within research and development expenses. Government grants Grants in respect of specific research and development projects are recognised as receivable when there is reasonable assurance that they will be received and the conditions to obtain them have been complied with. They are credited to the income statement in the same period as the related research and development costs for which the grant is compensating. The grant income is presented as a deduction from the related expense. Share-based payments The Group issues equity-settled share-based payments to certain employees. In accordance with IFRS 2, “Share-based payments”, equity-settled share-based payments are measured at fair value at the date of grant. Fair value is measured by use of the Black-Scholes pricing model. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of the number of shares that will eventually vest. The Group operates Save As You Earn (SAYE) schemes in the UK and an Employee Share Purchase Plan (ESPP) in the US, India, Japan, South Korea and Taiwan. Options under the SAYE schemes are granted at a 20% discount to the market price of the underlying shares on the date of announcement of the scheme and at a 15% discount to the lower of the market prices at the beginning and end of the scheme for the ESPP. The UK SAYE schemes are approved by the UK tax authorities, which stipulates that the saving period must be at least 36 months. The Group has recognised a compensation charge in respect of the SAYE plans and ESPPs. The charges for these are calculated as detailed above. The Group also has an LTIP on which it is also required to recognise a compensation charge under IFRS 2, calculated as detailed above. The share-based payments charge is allocated to cost of sales, research and development expenses, sales and marketing expenses, and general and administrative expenses on the basis of headcount. Employer’s taxes on share options Employer’s National Insurance in the UK and equivalent taxes in other jurisdictions are payable on the exercise of certain share options and vesting of share awards. In accordance with IFRS 2, this is treated as a cash-settled transaction. A provision is made, calculated using the intrinsic value of the relevant options and awards at the balance sheet date, and pro-rated over the vesting period of the options and awards.

73 ARM HOLDINGS PLC Governance and Financial Report 2013

Notes to the financial statements continued

1b Summary of significant accounting policies continued Retirement benefit costs The Group contributes to defined contribution plans substantially covering all employees in Europe and the US and to government pension schemes for employees in Japan, South Korea, Taiwan, PR China, Israel and India. The Group contributes to these plans based upon various fixed percentages of employee compensation, and such contributions are expensed as incurred. Operating leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Costs, net of any lease incentives, in respect of operating leases are charged on a straight-line basis over the lease term even if payments are not made on such a basis. Finance leases Leases in which substantially all of the risks and rewards of ownership are transferred to the lessee are classified as finance leases. Assets held under finance leases are recognised as assets of the Group at their fair value or, if lower, at the present value of the minimum lease payments, each determined at the inception of the lease. The corresponding liability to the lessor is included in the balance sheet as a finance lease liability. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly to the income statement. Foreign currency translation (a) Functional and presentation currency The functional currency of each Group entity is the currency of the primary economic environment in which that entity operates. The consolidated financial statements are presented in sterling, which is the presentation currency of the Group. (b) Transactions and balances Transactions denominated in foreign currencies have been translated into the functional currency of each Group entity at actual rates of exchange at the date of transaction. Monetary assets and liabilities denominated in foreign currencies have been translated at closing rates of exchange at the balance sheet date. Exchange differences have been included in general and administrative expenses. (c) Group companies The results and financial positions of all Group entities (none of which has the currency of a hyper-inflationary economy) not based in the UK are translated into sterling as follows: (i) Assets and liabilities for each balance sheet presented are translated at the closing rates of exchange at the balance sheet date. (ii) Income and expenses for each income statement presented are translated at the rates of exchange at the time of each transaction during the period. (iii) All resulting exchange differences are recognised as a separate component of equity, being taken through other comprehensive income via the cumulative translation adjustment. When a foreign operation is partially disposed of or sold, exchange differences that were recognised through other comprehensive income are recognised in the income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rates of exchange. Derivative financial instruments The Group utilises currency exchange contracts to manage the exchange risk on actual transactions related to accounts receivable, denominated in a currency other than the functional currency of the business. The Group’s currency exchange contracts do not subject the Group to risk from exchange rate movements because the gains and losses on such contracts offset losses and gains, respectively, on the transactions being hedged. The currency exchange contracts are recorded at fair value and the related foreign currency accounts receivable are revalued to spot rates at each period end. The fair value of forward exchange contracts is determined using quoted forward exchange rates at the balance sheet date. The fair value of foreign currency options is based upon valuations performed by management and the respective banks holding the currency instruments. All recognised gains and losses resulting from the settlement of the contracts are recorded within general and administrative expenses in the income statement. The Group does not enter into currency exchange contracts for the purpose of hedging anticipated transactions. Embedded derivatives In accordance with IAS 39, “Financial instruments: recognition and measurement”, the Group has reviewed all its contracts for embedded derivatives that are required to be separately accounted for if they do not meet certain requirements set out in the standard. From time to time, the Group may enter into contracts denominated in a currency (typically US dollars) that is neither the functional currency of the Group entity nor the functional currency of the customer or the collaborative partner. Where there are uninvoiced amounts on such contracts, the Group carries such derivatives at fair value. The resulting gain or loss is recognised in the income statement under general and administrative expenses.

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1b Summary of significant accounting policies continued Investment income, and interest payable and similar charges Investment income, and interest payable and similar charges relate to interest income and expense, which is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable. Dividends Distributions to owners of the Company are not recognised in the income statement under IFRS, but are disclosed as a component of the movement in shareholders’ equity. A liability is recorded for a dividend when the dividend is approved by the Company’s shareholders. Interim dividends are recognised as a distribution when paid. Earnings per share Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the year, excluding those held as treasury stock, which are treated as cancelled. For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares. The Company had two categories of dilutive potential ordinary shares during the year: those being share options granted to employees and directors where the exercise price is less than the average market price of the Company’s ordinary shares during the year and the awards made under the Company’s RSU, DAB plan, and LTIP schemes. For 2013 and 2012, no shares that were allocated for awards under the LTIP were included in the diluted EPS calculation as the performance criteria could not be measured until the conclusion of the performance period. Reconciliations of the earnings and weighted average number of shares used in the calculations are shown on the face of the consolidated income statement. Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held with banks, and other short-term highly liquid investments with original maturities of three months or less. The carrying amount approximates to fair value because of the short-term maturity of these instruments. Short- and long-term deposits The Group considers all highly-liquid investments with original maturity dates of greater than three months and maturing in less than one year to be short-term deposits. Deposits with a maturity date of greater than one year from the balance sheet date are classified as long-term. Accounts receivable Accounts receivable are initially recognised at fair value. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Accounts receivable are first assessed individually for impairment. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments (more than 90 days overdue) are considered indicators that the trade receivable may be impaired. Where there is no objective evidence of impairment for an individual receivable, it is included in a group of receivables with similar credit risk characteristics and these are collectively assessed for impairment. In the case of impairment, the carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in the income statement within general and administrative expenses. When a trade receivable is uncollectible, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited against general and administrative expenses in the income statement. Property, plant and equipment Property, plant and equipment is stated at historic cost less accumulated depreciation and any recognised impairment loss. The cost of property, plant and equipment is their purchase cost, together with any costs directly attributable to bringing the asset to its working condition for its intended use. External costs and internal costs are capitalised to the extent they enhance the future economic benefit of the asset. Assets in the course of construction are carried at cost less any recognised impairment loss. Depreciation of these assets commences when the assets are ready for their intended use.

75 ARM HOLDINGS PLC Governance and Financial Report 2013

Notes to the financial statements continued

1b Summary of significant accounting policies continued Property, plant and equipment continued Depreciation is calculated so as to write off the cost of property, plant and equipment, less their estimated residual values, which are adjusted, if appropriate, at each balance sheet date, on a straight-line basis over the expected useful economic lives of the assets concerned. The principal economic lives used for this purpose are: Freehold buildings 25 years Leasehold improvements Five to ten years or term of lease, whichever is shorter Computer equipment Three to five years Fixtures and fittings, and motor vehicles Three to five years Provision is made against the carrying value of property, plant and equipment where an impairment in value is deemed to have occurred. Asset lives and residual values are reviewed on an annual basis. Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised within general and administrative expenses in the income statement. Financial assets The Group classifies its financial assets in the following categories: at fair value through the income statement, loans and receivables, and available- for-sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of financial assets at initial recognition. (a) Financial assets at fair value through the income statement Financial assets at fair value through the income statement are financial assets held for trading – that is, assets that have been acquired principally for the purpose of selling in the short term. Assets in this category are classified as current assets. They are initially recognised at fair value with transaction costs being expensed in the income statement. Specifically, the Group’s currency exchange contracts and embedded derivatives fall within this category. Gains or losses arising from changes in the fair value of “financial assets at fair value through the income statement” are presented in the income statement within general and administrative expenses in the period in which they arise. (b) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets. “Accounts receivable”, “cash and cash equivalents”, and “short- and long-term deposits” are classified as “Loans and receivables” (see note 17). Loans and receivables are measured initially at fair value and then subsequently measured at amortised cost. (c) Available-for-sale financial assets AFS financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the assets within 12 months of the balance sheet date. Equity investments that are not publicly traded are also classified as AFS and are initially recorded at fair value plus transaction costs. Given that the markets for these assets are not active, the Group establishes fair value by using valuation techniques. The estimated fair value of these investments approximated to cost less any permanent diminution in value (based on estimates determined by management), except where independent valuation information is obtained. Unrealised holding gains or losses on such securities are recognised, net of related taxes, through other comprehensive income via a revaluation reserve, except where there is evidence of permanent impairment (in which case the loss is recognised through the income statement within general and administrative expenses or exceptional items where appropriate). Current investments have been valued based on the amount that is recoverable. Accounts payable Accounts payable are recognised at face value as they are settled within 12 months. Share capital Ordinary shares issued by the Company are recorded at the proceeds received, net of direct issue costs.

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1c Financial risk management The Group operates in the intensely competitive semiconductor industry, which has been characterised by price erosion, rapid technological change, short product life cycles, cyclical market patterns, and heightened foreign and domestic competition. Significant technological changes in the industry could affect operating results. The Group’s operations expose it to a variety of financial risks that include currency risk, interest rate risk, securities price risk, credit risk and liquidity risk. Given the size of the Group, the directors have not delegated the responsibility for monitoring financial risk management to a sub-committee of the Board. The policies set by the directors are implemented by the Group’s finance and treasury departments. The Group has a treasury policy that sets out specific guidelines to manage currency risk, interest rate risk, credit risk and liquidity risk and also sets out circumstances where it would be appropriate to use financial instruments to manage these. Currency risk The Group’s earnings and liquidity are affected by fluctuations in foreign currency exchange rates, principally in respect of the US dollar, reflecting the fact that most of its revenues and cash receipts are denominated in US dollars, while a significant proportion of its costs are settled in sterling. The Group seeks to use currency exchange contracts and currency options to manage the US dollar/sterling risk as appropriate, by monitoring the timing and value of anticipated US dollar receipts (which tend to arise from low-volume, high-value licence deals and royalty receipts) in comparison with its requirement to settle certain expenses in US dollars. The Group reviews the resulting exposure on a regular basis and hedges this exposure using currency exchange contracts and currency options for the sale of US dollars as appropriate. Such contracts are entered into with the objective of matching their maturity with projected US dollar cash receipts. The Group is also exposed to currency risk in respect of the foreign currency denominated assets and liabilities of its overseas subsidiaries. At present, the Group does not consider this to be a significant risk since the Group does not intend to move assets between group companies. The Group has elected not to apply hedge accounting, and all movements in the fair value of derivative foreign exchange instruments are recorded in the income statement, offsetting the foreign exchange movements on the accounts receivable, and cash and cash equivalents balances being hedged. In addition, certain customers remit royalties and licence fees in other currencies, primarily the Euro and Japanese yen. The Group is also required to settle certain expenses in these currencies, primarily in its French, German and Japanese subsidiaries, and as the net amounts involved are not considered significant, the Group does not take out forward-settling currency exchange contracts in these currencies. Interest rate risk Floating rate cash earns interest based on relevant national LIBID or base rate equivalents and is therefore exposed to cash flow interest rate risk. The proportion of funds held in fixed rather than floating rate deposits is determined in accordance with the policy outlined under “Liquidity risk” below. Other financial assets, such as AFS financial assets, are not directly exposed to interest rate risk. The Group had no derivative financial instruments to manage interest rate fluctuations in place at the year end since the level of financing was not considered significant, and as such no hedge accounting is applied. The Group’s cash flow is carefully monitored on a daily basis. Excess cash, considering expected future cash flows, is placed on either short- or long-term deposits to maximise the interest income thereon. Daily surpluses are swept into higher-interest earning accounts overnight. Securities price risk The Group is exposed to equity securities price risk on AFS financial assets. As there can be no guarantee that there will be a future market for these securities (which are generally unlisted at the time of investment) or that the value of such investments will rise, the directors evaluate each investment opportunity on its merits before committing the Group’s funds. The directors review holdings in such companies on a regular basis to determine whether continued investment is in the best interests of the Group. Funds for such ventures are limited in order that the financial effect of any potential decline of the value of investments will not be substantial in the context of the Group’s financial results. Credit risk Credit risk is managed on a Group basis. Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to customers, including outstanding receivables and committed transactions. At 31 December 2013 and 2012, the Group had no significant concentrations of credit risk. The amount of exposure to any individual counterparty is subject to a limit, which is reassessed periodically by the directors.

77 ARM HOLDINGS PLC Governance and Financial Report 2013

Notes to the financial statements continued

1c Financial risk management continued Credit risk continued The Group has implemented policies that require appropriate credit checks on potential customers before sales commence. The Group generally does not require collateral on accounts receivable, as many of its customers are large, well-established companies. The Group has not experienced any significant losses related to individual customers or groups of customers in any particular industry or geographic area. The Group markets and sells to a relatively small number of customers with individually large value transactions. The Group performs credit checks on all customers (other than those paying in advance) in order to assess their creditworthiness and ability to pay its invoices as they become due. As such, the balance of accounts receivable not owed by large companies is still deemed by the directors to be of low risk of default due to the nature of the checks performed on them, and accordingly a relatively small allowance against these receivables is in place to cover this low risk of default. No credit limits were exceeded during the reporting period and the directors do not expect any significant losses from non-performance by these counterparties, other than those already provided for. Liquidity risk The Group’s policy is to maintain balances of cash and cash equivalents, and short- and long-term deposits, such that highly liquid resources exceed the Group’s projected cash outflows at all times. Surplus funds are placed on fixed- or floating-rate deposits depending on the prevailing economic climate at the time (with reference to forward interest rates) and also on the required maturity of the deposit (as driven by the expected timing of the Group’s cash receipts and payments over the short- to medium-term). Management monitors rolling forecasts of the Group’s short- and medium-term expected cash flows. This is carried out at both a local and a Group level, with the local subsidiaries being funded by the Group as required. Capital risk management The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an appropriate capital structure. The capital structure of the Group consists of cash and cash equivalents, short- and long-term deposits and capital and reserves attributable to owners of the Company, as disclosed on the consolidated balance sheet. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, sell assets to raise cash or take on debt. The Group’s strategy is to have a capital structure that takes into account opportunities to invest in long-term profitable growth, prevailing trading conditions and the desire to improve balance sheet efficiency over time. The Group introduced a dividend in 2004 which has grown each year since. Between 2005 and 2008, an ongoing share buyback programme was in place whereby 16% of the issued share capital was bought back at an average price of £1.22. In 2013, the interim dividend was increased by 26% and the directors are proposing a 27% increase in the final dividend, reflecting the Board’s long-term confidence in the business. As well as continuing to grow the dividend, the Board intends to undertake a limited share buyback programme to maintain a flat share-count over time. No share buybacks were made in the current year. The capital structure is continually monitored by the Group. Valuation hierarchy The Group classifies its financial instruments as follows: level 1 instruments are those valued using unadjusted quoted prices in active markets for identical instruments; level 2 instruments are those valued using techniques based significantly on observable market data; and level 3 instruments are those valued using information other than observable market data. The Group has a team that performs the valuations of financial assets required for financial reporting purposes, including level 3 fair values. This team reports to the Chief Financial Officer and to the Audit Committee. The fair value of accounts and other receivables, other current financial assets, cash and cash equivalents, short- and long-term deposits, and accounts and other payables approximate to their carrying amount.

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2 Segmental reporting At 31 December 2013 the Group was organised on a world-wide basis into three main business segments: Processor Division (PD), encompassing those resources that are centred around microprocessor cores, including specific functions such as graphics IP, system IP, embedded software and configurable digital signal processing (DSP) IP. Physical IP Division (PIPD), concerned with the building blocks necessary for translation of a circuit design into actual silicon. System Design Division (SDD), focused on the tools and models used to create and debug software and system-on-chip (SoC) designs. This is based upon the Group’s internal organisation and management structure and is the primary way in which the CODM is provided with financial information. Whilst revenues are also reported into four main revenue streams (namely licensing, royalties, software and tools, and services), the costs, operating results and balance sheets are only analysed into these three divisions. Further, the information provided to the CODM is based on normalised profit before tax, a non-GAAP measure, and therefore this information is provided as well as the equivalent profit stated under IFRS. The reconciling items: intangible amortisation; acquisition-related charges; share-based payment costs including payroll taxes; disposal/impairment of investments; exceptional items; share of results in joint venture; and Linaro-related charges are analysed below. Also analysed are revenues; operating costs; investment income, net of interest payable and similar charges; profit/(loss) before tax; tax; profit/(loss) after tax; depreciation; total assets and liabilities; net assets; and goodwill for each segment and the Group in total. Business segment information

Processor Physical IP System Design Division Division Division Unallocated Group For the year ended 31 December 2013 £m £m £m £m £m Segmental income statement Revenues 596.2 82.0 36.4 – 714.6 Operating costs (426.6) (90.7) (42.6) (1.2) (561.1) Investment income, net of interest payable and similar charges – – – 13.1 13.1 Share of results in joint venture – – – (4.0) (4.0) Profit/(loss) before tax 169.6 (8.7) (6.2) 7.9 162.6 Tax – – – (57.8) (57.8) Profit/(loss) for the year 169.6 (8.7) (6.2) (49.9) 104.8 Reconciliation to normalised profit before tax: Amortisation on acquired intangibles and other acquisition-related charges 9.6 2.0 – – 11.6 Share-based payment costs including payroll taxes 54.5 12.1 7.4 – 74.0 Impairment of investments, net of profit on disposal 3.5 – – – 3.5 Exceptional items 101.3 – – – 101.3 Share of results in joint venture and Linaro-related charges 7.0 – – 4.0 11.0 Normalised profit before tax 345.5 5.4 1.2 11.9 364.0 Segmental balance sheet Total assets 389.4 400.1 31.6 817.3 1,638.4 Total liabilities (243.2) (46.0) (12.0) (25.8) (327.0) Net assets 146.2 354.1 19.6 791.5 1,311.4 Other segmental items Depreciation 9.6 2.8 2.0 – 14.4 Goodwill 151.5 360.2 14.2 – 525.9 Revenues (USD millions) 931.5 129.1 57.1 – 1,117.7

79 ARM HOLDINGS PLC Governance and Financial Report 2013

Notes to the financial statements continued

2 Segmental reporting continued Processor Physical IP System Design Division Division Division Unallocated Group For the year ended 31 December 2012 £m £m £m £m £m Segmental income statement Revenues 473.9 68.3 34.7 – 576.9 Operating costs (243.3) (82.8) (40.1) (2.6) (368.8) Investment income, net of interest payable and similar charges – – – 13.6 13.6 Share of results in joint venture – – – (0.7) (0.7) Profit/(loss) before tax 230.6 (14.5) (5.4) 10.3 221.0 Tax – – – (60.3) (60.3) Profit/(loss) for the year 230.6 (14.5) (5.4) (50.0) 160.7 Reconciliation to normalised profit/(loss) before tax: Amortisation on acquired intangibles and other acquisition-related charges 5.5 2.5 – 0.8 8.8 Share-based payment costs including payroll taxes 30.0 8.6 6.8 – 45.4 Profit on sale of investments, net of impairment 0.6 – – – 0.6 Share of results in joint venture – – – 0.7 0.7 Normalised profit/(loss) before tax 266.7 (3.4) 1.4 11.8 276.5 Segmental balance sheet Total assets 284.6 409.2 32.5 740.5 1,466.8 Total liabilities (182.6) (43.9) (15.1) (19.1) (260.7) Net assets 102.0 365.3 17.4 721.4 1,206.1 Other segmental items Depreciation 6.7 2.5 1.6 – 10.8 Goodwill 138.0 367.0 14.4 – 519.4 Revenues (USD millions) 749.8 108.4 54.9 – 913.1 There are no inter-segment revenues. Unallocated operating costs consist of foreign exchange gains and losses. Unallocated assets and liabilities include: cash and cash equivalents; short- and long-term deposits; AFS financial assets; loans and receivables; embedded derivatives; fair value of currency exchange contracts; deferred tax balances; current tax; and VAT. During the year ended 31 December 2013 one customer (within all three business segments) accounted for 12% of the Group’s total revenues amounting to £87.6 million (2012: one customer accounted for 15%). The results of each segment have been prepared using accounting policies consistent with those of the Group as a whole.

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2 Segmental reporting continued Geographical information The Group manages its business segments on a global basis. The operations are based in three main geographical areas. The UK is the home country of the parent company. The main operations are in the following principal territories: • Europe • United States • Asia Pacific Analysis of revenue by destination*:

2013 2012 £m £m United States 280.3 215.9 South Korea 101.7 95.0 Taiwan 99.4 69.2 China 90.0 71.2 Japan 47.6 46.6 Switzerland 24.8 14.0 Singapore 24.6 9.2 Germany 13.4 15.4 Netherlands 8.5 15.8 Rest of Europe 19.7 19.0 Rest of Asia Pacific 3.6 4.4 Rest of North America 1.0 1.2 714.6 576.9 * Destination is defined as the location of the Group’s customers’ operations. The Group’s revenue within the home country of the parent company amounted to £4.9 million and £5.5 million for the years ended 31 December 2013 and 2012 respectively. The Group’s exports from the UK were £699.2 million and £560.3 million for the years ended 31 December 2013 and 2012 respectively. Analysis of revenue by origin:

2013 2012 £m £m Europe* 705.3 567.8 United States 9.3 9.1 714.6 576.9 * Includes the UK, which had total revenues of £704.1 million in 2013 (2012: £565.8 million). Analysis of revenue by revenue stream:

2013 2012 £m £m Royalties 358.3 299.8 Licensing 285.6 214.0 Software and tools 36.4 34.7 Services 34.3 28.4 714.6 576.9

81 ARM HOLDINGS PLC Governance and Financial Report 2013

Notes to the financial statements continued

2 Segmental reporting continued Geographical information continued Analysis of non-current assets (excluding deferred tax assets, goodwill and other intangible assets):

2013 2012 £m £m Europe* 172.0 193.8 United States 7.2 5.2 Asia Pacific 5.0 3.1 184.2 202.1 * Includes the UK, which had non-current assets (excluding deferred tax assets, goodwill and other intangible assets) of £171.0 million in 2013 (2012: £192.8 million), of which long-term deposits accounted for £125.6 million (2012: £141.3 million). 3 Key management compensation and directors’ emoluments Key management compensation The directors are of the opinion that the key management of the Group comprises the executive and non-executive directors of ARM Holdings plc together with the Executive Committee (comprising all directors of ARM Limited and certain senior management). These persons have authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly. At 31 December 2013, key management comprised 21 people (2012: 19). The aggregate amounts of key management compensation are set out below:

2013 2012 £m £m Salaries and short-term employee benefits 9.5 8.9 Share-based payments 6.1 3.4 Post-employment benefits 0.2 0.2 15.8 12.5 Directors’ emoluments The aggregate emoluments of the directors of the Company are set out below:

2013 2012 £m £m Aggregate emoluments in respect of qualifying services 3.8 4.9 Aggregate payments for pension-related benefits 0.2 0.2 Aggregate gains on exercise of share options 3.9 1.8 Aggregate amounts receivable in shares under the DAB Plan 12.9 11.5 Aggregate amounts receivable under the LTIP 17.2 21.2 38.0 39.6 Detailed disclosures of directors’ emoluments are shown on page 46 and 47. Details of directors’ interests in share options and awards are shown on pages 48 to 53, which form part of the financial statements.

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4 Employee information The average monthly number of persons, including executive directors, employed by the Group during the year was:

2013 2012 Number Number By segment Processor Division 1,667 1,398 Physical IP Division 615 557 System Design Division 316 306 2,598 2,261

2013 2012 Number Number By activity Research and development 1,803 1,581 Sales and marketing 425 367 General and administrative 370 313 2,598 2,261

2013 2012 £m £m Staff costs (for the above persons) Wages and salaries 185.4 161.5 Medical care costs 5.5 5.0 Share-based payments (note 20) 59.2 37.1 Social security costs 35.1 30.2 Movement on provision for social security costs on share awards (1.4) (6.1) Other pension costs 8.7 8.0 292.5 235.7

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Notes to the financial statements continued

5 Profit before tax: analysis of expenses by nature The following items have been charged/(credited) to the income statement in arriving at profit before tax:

2013 2012 £m £m Staff costs, including share-based payments (note 4) 292.5 235.7 Cost of inventories recognised as an expense 2.8 3.2 Depreciation of property, plant and equipment – owned assets (note 12) 11.6 9.5 Depreciation of property, plant and equipment – under finance leases (note 12) 2.8 1.3 Amortisation of other intangible assets (note 14) – Cost of revenues 0.3 0.3 – Research and development expenses 6.9 2.3 – Sales and marketing expenses 0.6 0.9 – General and administrative expenses 5.8 3.1 Government grants – research and development expenditure credit (5.8) – Exceptional items (note 6) – Impairment of current AFS financial asset 59.5 – – IP indemnity and similar charges 41.8 – Impairment of non-current AFS financial assets (note 11) 6.8 1.4 Profit on disposal of AFS financial assets (3.3) (0.8) Other operating lease rentals payable – Plant and machinery 26.2 24.0 – Property 8.7 7.6 Accounts receivables impairment (including movement in provision) 4.0 0.4 Fair value movement on embedded derivatives 4.5 3.7 Other foreign exchange gains (3.3) (1.9) Services provided by the Group’s auditor and its associates During the year the Group (including its overseas subsidiaries) obtained the following services from the Group’s auditor and its associates:

2013 2012 £m £m Fees payable to the Group’s auditor and its associates for the audit of the Company and consolidated financial statements 0.3 0.3 Fees payable to the Group’s auditor and its associates for other services: – The audit of the Group’s subsidiaries 0.2 0.2 – Audit-related assurance services (services pursuant to section 404 of the Sarbanes-Oxley Act) 0.3 0.3 – Other assurance services 0.1 0.1 Statutory audit, financial reporting and other related services 0.9 0.9 – Tax advisory services 0.1 0.2 – Tax compliance services – 0.1 – All other non-audit services* 0.1 0.1 1.1 1.3 * All other non-audit services consist predominantly of fees for the performance of royalty audits.

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6 Exceptional items IP indemnity and similar charges As noted in prior financial statements, the Group had been in discussions with a licensee to re-negotiate the terms upon which the Group would indemnify that licensee. During 2013, terms were executed and the Group incurred indemnification costs amounting to $18.0 million. Further in relation to legal proceedings regarding the same patent portfolio, for a consideration of $45.4 million, ARM entered into a licence agreement with a third party covering patents being asserted against ARM technology in litigation between the patentee and a number of licensees of ARM technology. The licence was entered into in full and final settlement of any indemnity claims with respect to the asserted patents and will prevent any future assertion of the patents against ARM technology. Total indemnification, settlement and licence costs of $63.4 million (£41.8 million) were expensed as an exceptional item in 2013, resulting in a tax deduction in current tax of £9.7 million. Impairment of available-for-sale financial assets (current) During the year, the Group participated in a consortium, via a trust, to acquire certain patent rights. These rights were not subject to actual or threatened legal proceedings. Of the Group’s total contribution to the consortium, $100.5 million was classified within current AFS financial assets (£60.7 million after translation at 31 December 2013 exchange rates) and $67 million, the residual, was classified within other intangible assets (£37.4 million after amortisation to 31 December 2013). The available-for-sale financial asset represented ARM’s right to receive cash from the Group's financial interest in the consortium, as it was anticipated that a programme of licensing the patents to third parties would be undertaken by the trust. The other intangible asset consists of IP rights that are being amortised over a period of eight and a half years, being the average remaining life of the underlying patent portfolio. In Q4 2013, the trust made a strategic decision not to pursue a licensing programme and the portfolio was put up for sale by auction. The Group acquired the patents in January 2014 for $4.0 million (£2.4 million) which will be accounted for as an additional intangible asset. As there is no longer an expectation of any future cash flows with respect to licensing of the patents by the trust, the AFS financial asset has been impaired down to the value of the Group’s share of the auction proceeds, giving rise to a non-cash exceptional charge of $98.5 million (£59.5 million). As disclosed in note 7, a deferred tax asset has not been recognised in relation to this exceptional item, increasing the current tax charge by £18.3 million. 7 Tax Analysis of charge in the year:

2013 2012 £m £m Current tax: Current tax on profits for the year 56.5 47.5 Adjustments in respect of prior years (0.2) (0.5) Total current tax 56.3 47.0 Deferred tax: Origination and reversal of temporary differences (4.1) 11.8 Impact of change in the UK statutory tax rate 0.1 1.5 Impact of change due to the UK patent box regime 5.5 – Total deferred tax 1.5 13.3 Income tax expense 57.8 60.3 Analysis of tax on items charged to equity:

2013 2012 £m £m Deferred tax charge on outstanding share options and awards 4.8 9.7 Current tax benefit on share options and awards (27.0) (27.4) Deferred tax credit on AFS financial assets – (0.1)

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Notes to the financial statements continued

7 Tax continued The tax charge for the year was different from the standard rate of corporation tax in the UK, as explained below:

2013 2012 £m £m Profit before tax 162.6 221.0 Profit before tax at the corporation tax rate of 23.25% (2012: 24.5%) 37.8 54.2 Effects of: Adjustments in respect of prior years (0.2) (0.5) Adjustments in respect of foreign tax rates 4.1 5.0 Research and development tax credits * (6.6) (5.5) Current impact of the UK patent box regime (4.8) – Remeasurement of deferred tax assets due to reduction in UK statutory tax rate 0.1 1.5 Remeasurement of deferred tax assets due to the UK patent box regime 5.5 – US deferred tax assets not recognised ** 17.5 3.4 Foreign withholding tax 3.0 1.0 Impact of share-based payments (1.5) 0.3 Other *** 2.9 0.9 Total taxation 57.8 60.3 * The provisions extending the US federal R&D tax credits into 2012 were signed on 2 January 2013. As a result of the provisions being enacted in 2013, 2012 R&D tax credits of £2.1 million have been accounted for in 2013. ** Includes the tax impact of the exceptional charge of £59.5 million for the impairment of an AFS financial asset which gave rise to a tax loss that has not been recognised because it is not probable that the loss will be utilised. *** Includes expenditure disallowable for tax purposes.

Deferred tax Deferred tax is calculated in full on temporary differences under the liability method using the tax rate relevant to each tax jurisdiction. The movement on the deferred tax account is shown below:

2013 2012 £m £m At 1 January 70.1 105.9 Amount acquired with subsidiary undertaking (1.2) – Income statement charge (1.5) (13.3) Adjustment in respect of share-based payments (4.8) (9.7) Prior year movement from/(to) current tax assets 3.0 (11.6) Exchange differences (0.4) (1.3) Revaluation of AFS financial asset – 0.1 At 31 December 65.2 70.1 Deferred tax assets have been partially recognised in respect of tax losses and other temporary differences giving rise to deferred tax assets because it is not probable that the unrecognised portion of these assets will be recovered. The amount of deferred tax assets unrecognised at 31 December 2013 was £23.2 million (2012: £4.4 million). The unrecognised deferred tax assets relate to historic losses of acquired subsidiaries and the loss arising on the impairment of an AFS financial asset. The losses may remain unutilised due to restrictions imposed by local tax legislation and availability of relevant future profits. No deferred tax has been recognised in respect of a further £33.2 million (2012: £35.0 million) of unremitted earnings of overseas subsidiaries because the Group is in a position to control the timing of the reversal of these differences and either it is possible that such differences will not reverse in the foreseeable future or no tax is payable on the reversal.

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7 Tax continued At the balance sheet date the UK Government had enacted a 2% reduction in the main rate of UK corporation tax from 23% to 21% from 1 April 2014 and a further 1% reduction to 20% from 1 April 2015. The UK Government has also introduced the new patent box regime, which seeks to tax all profits attributable to patented technology at a reduced rate of 10%. The rules are to be phased in over five years from 1 April 2013 – a company will be entitled to only 60% of the deduction in financial year 2013/14, rising to 100% by 2017/18. The impact of these changes on the deferred tax balances of the Group is included in the tax charge. The movements in deferred tax assets and liabilities (prior to offsetting of balances within the same tax jurisdiction as permitted by IAS 12) during the year are shown below. Deferred tax assets and liabilities are only offset where there is a legally enforceable right of offset and there is an intention to settle the balances net. Deferred tax assets

Amounts Temporary Tax losses Temporary relating to differences and R&D tax differences share-based relating to credits carried relating to payments fixed assets forward reserves Other Total £m £m £m £m £m £m At 1 January 2013 43.5 2.6 15.1 9.5 0.6 71.3 Amount acquired with subsidiary undertaking – – 0.5 – – 0.5 Prior year movement from current tax assets – – 3.0 – – 3.0 Income statement credit/(charge) 0.8 1.3 (2.8) (1.5) 0.3 (1.9) Movement on deferred tax arising on outstanding share options and awards (4.8) – – – – (4.8) Unutilised current year share option deductions (6.7) – 6.7 – – – Exchange differences – – (0.4) – – (0.4) At 31 December 2013 (prior to offsetting) 32.8 3.9 22.1 8.0 0.9 67.7 Offsetting of deferred tax liabilities (2.4) At 31 December 2013 (after offsetting) 65.3 At 1 January 2012 59.5 4.6 30.9 12.7 – 107.7 Prior year movement to current tax assets – – (11.6) – – (11.6) Income statement (charge)/credit (0.1) (2.0) (9.1) (3.2) 0.6 (13.8) Movement on deferred tax arising on outstanding share options and awards (9.7) – – – – (9.7) Unutilised current year share option deductions (6.2) – 6.2 – – – Exchange differences – – (1.3) – – (1.3) At 31 December 2012 (prior to offsetting) 43.5 2.6 15.1 9.5 0.6 71.3 Offsetting of deferred tax liabilities (1.2) At 31 December 2012 (after offsetting) 70.1

The deferred tax asset to be recovered after more than one year is £35.2 million (2012: £29.6 million).

87 ARM HOLDINGS PLC Governance and Financial Report 2013

Notes to the financial statements continued

7 Tax continued Deferred tax liabilities

Amounts relating to intangible assets Temporary difference arising on acquisition on AFS financial assets Other Total £m £m £m £m At 1 January 2013 1.1 – 0.1 1.2 Amount acquired with subsidiary undertaking 1.7 – – 1.7 Movement in respect of amortisation of intangible assets (0.2) – – (0.2) Other short-term differences (0.1) – (0.1) (0.2) At 31 December 2013 (prior to offsetting) 2.5 – – 2.5 Offsetting of deferred tax assets (2.4) At 31 December 2013 (after offsetting) 0.1 At 1 January 2012 1.3 0.1 0.4 1.8 Movement in respect of amortisation of intangible assets (0.2) – – (0.2) Movement through reserves – (0.1) – (0.1) Other short-term differences – – (0.3) (0.3) At 31 December 2012 (prior to offsetting) 1.1 – 0.1 1.2 Offsetting of deferred tax assets (1.2) At 31 December 2012 (after offsetting) – The deferred tax liability due after more than one year prior to offsetting is £1.2 million (2012: £0.8 million). 8 Dividends

2013 2012 £m £m Final 2011 paid at 2.09 pence per share – 28.8 Interim 2012 paid at 1.67 pence per share – 23.0 Final 2012 paid at 2.83 pence per share 39.5 – Interim 2013 paid at 2.10 pence per share 29.4 – 68.9 51.8 In addition, the directors are proposing a final dividend in respect of the financial year ended 31 December 2013 of 3.6 pence per share, which will absorb an estimated £51 million of shareholders’ funds. Subject to approval at the 2014 AGM, it will be paid on 16 May 2014 to shareholders who are on the register of members on 22 April 2014.

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9 Accounts receivable

2013 2012 £m £m Trade debtors (including receivables from related parties – see note 24) 140.3 119.1 Less: Provision for impairment of trade debtors (9.7) (2.4) Trade debtors, net 130.6 116.7 Amounts recoverable on contracts 5.6 7.8 Current accounts receivable 136.2 124.5 Movements in the Group’s provision for impairment of trade debtors are as follows:

2013 2012 £m £m At 1 January (2.4) (1.7) Charge to income statement (4.0) (0.4) Reclassification from deferred income (3.5) (0.4) Foreign exchange 0.2 0.1 At 31 December (9.7) (2.4) See also note 17 for further disclosure regarding the credit quality of the Group’s gross trade debtors. 10 Prepaid expenses and other assets

2013 2012 £m £m Other receivables 18.1 10.4 Prepayments and accrued income 21.7 125.2 Current prepaid expenses and other assets 39.8 135.6 Plus: non-current prepayments and accrued income 1.6 2.0 Total prepaid expenses and other assets 41.4 137.6 Included within prepayments and accrued income at 31 December 2012 was a prepayment amounting to £103.7 million, being the Group’s advance contribution to acquire rights to MIPS Technologies, Inc.’s portfolio of patents. The Group has determined that the participation in the consortium conferred on the Group two separate rights: an intangible asset, conferring the right to use the assets in the Group’s own business of £41.9 million (see note 14), and an AFS financial asset of £63.4 million (see note 11), conferring the right to certain potential future revenue streams arising from the licensing activities of the trust.

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Notes to the financial statements continued

11 Available-for-sale financial assets

2013 2012 Non-current investments £m £m Net book value At 1 January 13.8 27.3 Additions (including capitalised interest of £0.2 million in 2012) 8.9 3.2 Revaluation recognised through other comprehensive income – (0.4) Disposals (1.7) (14.9) Foreign exchange translation (0.3) – Impairment recognised through income statement (general and administrative expenses) (6.8) (1.4) At 31 December 13.9 13.8

2013 2012 Current investments £m £m Net book value At 1 January – – Additions 63.4 – Foreign exchange translation (2.7) – Impairment recognised through income statement (as an exceptional item, see note 6) (59.5) – At 31 December 1.2 – All investments noted above are considered to be Level 3 financial assets. See note 17.

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11 Available-for-sale financial assets continued Non-current investments Those unlisted companies in which the Group has invested are generally early-stage development enterprises, which are generating value for shareholders through research and development activities, and most do not currently report profits. The fair value of these investments is considered to approximate to cost or is determined using independent valuation information where available. The Group’s investments include the following companies: • Amantys Limited • Ambiq Micro Inc. • Cambridge Innovation Capital plc • Carbon Design Systems Inc. • Cyclos Semiconductor Inc. • Marmalade Technologies Limited (formerly Ideaworks 3D Limited) • Shanghai Walden Venture Capital Enterprise • Thunder Software Technology Co. Ltd • Triad Semiconductor Inc. During the year the Group disposed of its investments in Arteris Holdings Inc and eSol Co. Ltd. At 31 December 2013 and 2012, the Group had no listed investments. Available-for-sale financial assets include the following:

2013 2012 £m £m Unlisted equity securities – UK 6.2 3.7 Unlisted equity securities – China 1.9 2.0 Unlisted equity securities – Japan – 0.9 Unlisted equity securities – US 1.4 5.9 Convertible loan notes – UK 1.3 1.3 Convertible loan notes – US 3.1 – Total non-current financial assets 13.9 13.8 Available-for-sale financial assets are denominated in the following currencies:

2013 2012 £m £m Sterling 9.5 12.5 US dollars 4.4 1.3 Total financial assets 13.9 13.8 A permanent 10% fall in the underlying value of those unlisted companies in which the Group has invested as at 31 December 2013 would have reduced the Group’s post-tax profit by £1.1 million (2012: £1.0 million) and resulted in a £nil (2012: £nil) reduction in other components of equity.

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Notes to the financial statements continued

12 Property, plant and equipment

Fixtures, fittings Assets in the Freehold Leasehold Computer and motor course of buildings improvements equipment vehicles construction Total £m £m £m £m £m £m Cost At 1 January 2013 0.2 23.1 48.8 6.4 3.5 82.0 Additions – 2.5 8.1 1.8 2.6 15.0 Acquisitions – – 0.1 0.1 – 0.2 Transfers – 0.9 2.3 – (3.2) – Reclassification* – – (3.2) – (1.7) (4.9) Disposals – (1.7) (5.7) (1.0) (0.4) (8.8) Exchange differences – (0.6) (1.0) (0.3) (0.1) (2.0) At 31 December 2013 0.2 24.2 49.4 7.0 0.7 81.5 Accumulated depreciation At 1 January 2013 0.1 13.9 27.5 4.4 – 45.9 Charge for the year – 2.3 11.0 1.1 – 14.4 Acquisitions – – 0.1 – – 0.1 Reclassification* – – (3.2) – – (3.2) Disposals – (1.5) (5.7) (1.0) – (8.2) Exchange differences – (0.2) (0.8) (0.1) – (1.1) At 31 December 2013 0.1 14.5 28.9 4.4 – 47.9 Net book value At 31 December 2013 0.1 9.7 20.5 2.6 0.7 33.6

Fixtures, fittings Assets in the Freehold Leasehold Computer and motor course of buildings improvements equipment vehicles construction Total £m £m £m £m £m £m Cost At 1 January 2012 0.2 18.0 32.5 5.7 0.9 57.3 Additions – 1.7 14.0 1.1 12.4 29.2 Transfers – 4.9 4.9 – (9.8) – Disposals – (1.1) (1.8) (0.2) – (3.1) Exchange differences – (0.4) (0.8) (0.2) – (1.4) At 31 December 2012 0.2 23.1 48.8 6.4 3.5 82.0 Accumulated depreciation At 1 January 2012 0.1 13.5 21.8 3.8 – 39.2 Charge for the year – 1.8 8.1 0.9 – 10.8 Disposals – (1.1) (1.8) (0.2) – (3.1) Exchange differences – (0.3) (0.6) (0.1) – (1.0) At 31 December 2012 0.1 13.9 27.5 4.4 – 45.9 Net book value At 31 December 2012 0.1 9.2 21.3 2.0 3.5 36.1 Net book value at 1 January 2012 0.1 4.5 10.7 1.9 0.9 18.1 Included within computer equipment are assets with net book value of £6.6 million (2012: £7.7 million) held under finance leases. * Reclassification from property, plant and equipment to intangible assets (software).

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13 Goodwill

£m At 1 January 2012 542.5 Exchange differences (23.1) At 31 December 2012 519.4 Exchange differences (9.9) Acquisition – Sensinode (note 19) 6.4 Acquisition – Geomerics (note 19) 10.0 At 31 December 2013 525.9 During the fourth quarter of 2013, the directors tested the Group’s balance of goodwill for impairment in accordance with IAS 36,“Impairment of assets”. No impairment charge was recorded as a result of this annual impairment test. Goodwill is allocated to the Group’s CGUs according to business segment. The carrying amounts of goodwill by CGU at 31 December 2013 are summarised below:

Processor Physical IP System Design Division Division Division Group £m £m £m £m Goodwill relating to Artisan 119.0 357.1 – 476.1 Goodwill relating to Geomerics 10.0 – – 10.0 Goodwill relating to Falanx 9.4 – – 9.4 Goodwill relating to Axys – – 7.3 7.3 Goodwill relating to KEG and KSI – – 6.9 6.9 Goodwill relating to Sensinode 5.8 – – 5.8 Goodwill relating to Prolific – 3.1 – 3.1 Goodwill relating to Obsidian 3.0 – – 3.0 Goodwill relating to Logipard 2.2 – – 2.2 Goodwill relating to other acquisitions 2.1 – – 2.1 Goodwill at 31 December 2013 151.5 360.2 14.2 525.9 Goodwill at 31 December 2012 138.0 367.0 14.4 519.4 The recoverable amount for each CGU has been measured based on a value-in-use calculation. Allocation of goodwill relating to Artisan The directors believed that, in addition to forming the basis of the Physical IP Division (PIPD), the Group’s acquisition of Artisan in 2004 would provide a benefit to the Processor Division (PD) for the following reasons: • The development of faster and more power-efficient microprocessors as a result of collaboration between PD and PIPD engineering teams. This is expected to generate more PD licensing deals at higher values. • The potential for PD to win more microprocessor licensing business as a result of ARM being able to offer both processor and physical IP in- house. The goodwill relating to Artisan was allocated between the two divisions accordingly. Processor Division PD encompasses those resources that are centred around microprocessor cores, including specific functions such as graphics IP, system IP, embedded software IP and configurable DSP IP. The key assumptions in the value-in-use calculations were: Period of projected cash flows The directors have used a ten-year forecast period with an assumed terminal growth rate after 2023 of 3% per annum. Given the long-term nature of the ARM licensing and royalty business model, it is considered appropriate to use a ten-year forecast period to assess the expected future cash flows to be generated from the assets under review. Revenue growth Revenue growth assumptions are based on financial budgets and forecasts approved by senior management, taking into account typical semiconductor industry growth rates and ARM’s historical experience in the context of wider industry and economic conditions.

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Notes to the financial statements continued

13 Goodwill continued Operating margins Operating margins have been assumed to remain constant over the period of the calculation. Discount rate Future cash flows are discounted at a rate of 10% per annum post tax. Conclusion The directors are confident that the amount of goodwill allocated to PD is appropriate and that the assumptions used in estimating its fair value are appropriate. Whilst it is conceivable that a key assumption in the calculation could change, the directors believe that no reasonably foreseeable changes to key assumptions would result in an impairment of goodwill, such is the margin by which the estimated fair value exceeds the carrying value. Physical IP Division PIPD is concerned with the building blocks necessary for translation of a circuit design into actual silicon. The key assumptions in the value-in-use calculations were: Period of projected cash flows The directors have used a ten-year forecast period with an assumed terminal growth rate after 2023 of 3% per annum. Given the long-term nature of the ARM licensing and royalty business model, it is considered appropriate to use a ten-year forecast period to assess the expected future cash flows to be generated from the assets under review. This timescale is consistent with ARM’s experience in developing the processor licensing and royalty model. ARM has signed more than 1,000 processor licences with around 350 customers since the formation of the Group with less than half of these paying royalties thus far. As royalty revenues are a function of cumulative licensing, royalty growth gathers momentum as the licensing base grows – ARM processor royalties have increased from $72 million in 2003 to $495 million in 2013. Revenue growth Revenue growth assumptions are based on financial budgets and forecasts approved by senior management, taking into account typical semiconductor industry growth rates and ARM’s historical experience in the context of wider industry and economic conditions. Since the acquisition of Artisan at the end of 2004, PIPD has accelerated the development of leading-edge physical IP technology. As semiconductor process geometries shrink, PIPD is expected to have more licensing opportunities across a broader range of foundries and other semiconductor companies. US dollar licence revenues increased by 25% year-on-year in 2013 and royalty revenues increased by 13%. The increase in revenues was due mainly to the successful delivery of new products licensed in the previous year. Further licensing of new technology was achieved in the year and as a result, backlog at the end of 2013 was at a similar level to the beginning of the year. This continuing licensing activity is expected to translate into growth in royalty revenues in future years. The directors believe that the investment in the physical IP technology portfolio in recent years will not only generate growth in physical IP revenue in future years, but also contribute significantly to the success of PD due to the synergistic benefits of the combined technologies. An estimate of the increased benefits to PD arising as a result of the combination with physical IP products is taken in to account in calculating the value-in-use for PIPD. Over the ten-year period of the forecast it is estimated that on average 8% of PD revenues would be allocated to PIPD. Demand for Processor Optimisation Packs (POPs) continued to be strong in 2013, with a number of Partners taking licences alongside PD processors. POPs enable an enhanced and deterministic outcome for licensees when implementing ARM processors. Operating margins Operating margins are assumed to increase gradually over time to approximately 15% by the end of the forecast period. In 2013, PIPD continued to make progress and recorded a profit on a normalised basis for the first time. This was mostly as a result of increased revenues offset by continued investment in the development of leading-edge technology. Margins are expected to improve significantly in future years as licence revenues from leading-edge products gather pace. Growth in high-margin royalty revenues will further improve profitability. Costs are expected to grow relatively slowly in real terms. Discount rate Future cash flows are discounted at a rate of 10% per annum post tax. Conclusion The directors are confident that the amount of goodwill allocated to PIPD and the assumptions used in estimating its fair value are appropriate. Whilst it is conceivable that a key assumption in the calculation could change, the directors believe that no reasonably foreseeable changes to key assumptions would result in an impairment of goodwill, such is the margin by which the estimated fair value exceeds the carrying value. The overall assessment is most sensitive to changes in the assumed revenues and benefits provided to the Processor Division (see Note 1, Critical Estimates and Judgements). The directors have considered the impact of a number of scenarios on the overall valuation of the PIPD business, including a considerable reduction in the benefits assumed to be provided to the Processor Division. The results of this sensitivity analysis showed that applying a range of reasonable variations to the key assumptions would not change the conclusion that no impairment in the carrying value of the goodwill is required at 31 December 2013.

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13 Goodwill continued System Design Division SDD develops and sells the tools and models used to create and debug software and SoC designs. The key assumptions in the value-in-use calculations were: Period of projected cash flows The directors have used a five-year forecast period with an assumed terminal growth rate after 2018 of 3% per annum. It is considered appropriate to use a five-year forecast period to properly reflect the weighted average period over which the benefits of the acquisitions of Axys, KEG and KSI are expected to accrue. Revenue growth Revenue growth assumptions are based on financial budgets and forecasts approved by senior management, taking into account typical semiconductor industry growth rates and ARM’s historical experience in the context of wider industry and economic conditions. Operating margins Operating margins are assumed to grow gradually during the period. Discount rate Future cash flows are discounted at a rate of 10% per annum post tax. Conclusion The directors are confident that the amount of goodwill allocated to SDD and the assumptions used in estimating its fair value are appropriate. Whilst it is conceivable that a key assumption in the calculation could change, the directors believe that no reasonably foreseeable changes to key assumptions would result in an impairment of goodwill, such is the margin by which the estimated fair value exceeds the carrying value. 14 Other intangible assets

Existing In-process agreements Trademarks Computer Patents and research and Developed and customer Core and Order software licences development technology relationships technology tradenames backlog Total £m £m £m £m £m £m £m £m £m Cost At 1 January 2013 14.1 26.8 5.9 39.6 53.3 16.8 4.5 2.0 163.0 Additions 2.0 74.1 – 7.5 0.3 – – – 83.9 Reclassification* 4.9 – – – – – – – 4.9 Disposals and derecognitions (1.5) – – – – – – (2.0) (3.5) Exchange differences (0.1) – (0.1) (0.4) (0.8) (0.3) (0.1) – (1.8) At 31 December 2013 19.4 100.9 5.8 46.7 52.8 16.5 4.4 – 246.5 Accumulated amortisation At 1 January 2013 10.3 23.1 5.9 37.7 52.8 15.5 4.5 2.0 151.8 Charge for the year 2.3 8.3 – 1.5 0.6 0.9 – – 13.6 Reclassification* 3.2 – – – – – – – 3.2 Disposals and derecognitions (1.5) – – – – – – (2.0) (3.5) Exchange differences – – (0.1) (0.2) (0.8) (0.3) (0.1) – (1.5) At 31 December 2013 14.3 31.4 5.8 39.0 52.6 16.1 4.4 – 163.6 Net book value At 31 December 2013 5.1 69.5 – 7.7 0.2 0.4 – – 82.9 * Reclassification from property, plant and equipment to intangible assets (software). The net book value of patents and licences includes a patent licence agreement for interconnect technology used in SoCs, with a carrying value of £16.0 million at 31 December 2013 (2012: £nil) and a remaining useful life of 9 years, and IP rights acquired from Bridge Crossing LLC (see note 6) with a carrying value of £37.4 million at 31 December 2013 (2012: £nil) and a remaining useful life of 8 years.

95 ARM HOLDINGS PLC Governance and Financial Report 2013

Notes to the financial statements continued

14 Other intangible assets continued

Existing In-process agreements Trademarks Computer Patents and research and Developed and customer Core and Order software licences development technology relationships technology tradenames backlog Total £m £m £m £m £m £m £m £m £m Cost At 1 January 2012 10.4 25.4 6.2 41.0 55.5 17.6 4.7 2.1 162.9 Additions 4.0 1.4 – – – – – – 5.4 Disposals (0.2) – – – – – – – (0.2) Exchange differences (0.1) – (0.3) (1.4) (2.2) (0.8) (0.2) (0.1) (5.1) At 31 December 2012 14.1 26.8 5.9 39.6 53.3 16.8 4.5 2.0 163.0 Accumulated amortisation At 1 January 2012 9.0 20.8 6.2 37.7 54.6 15.3 4.7 2.1 150.4 Charge for the year 1.6 2.3 – 1.4 0.4 0.9 – – 6.6 Disposals (0.2) – – – – – – – (0.2) Exchange differences (0.1) – (0.3) (1.4) (2.2) (0.7) (0.2) (0.1) (5.0) At 31 December 2012 10.3 23.1 5.9 37.7 52.8 15.5 4.5 2.0 151.8 Net book value At 31 December 2012 3.8 3.7 – 1.9 0.5 1.3 – – 11.2

15 Accrued and other liabilities

2013 2012 £m £m Accruals: Provision for payroll taxes on share awards 15.1 16.5 Employee bonus and sales commissions 26.5 23.8 Other accruals (including £2.6 million non-current (2012: £nil)) 40.0 31.0 Total accruals 81.6 71.3

Other taxation and social security 4.4 3.4 Other payables 4.7 4.6 Total accrued and other liabilities 90.7 79.3

16 Finance lease liabilities

2013 2012 £m £m Gross finance lease liabilities – minimum lease payments: Within one year 2.9 3.1 In the second to fifth years inclusive 1.5 3.0 Less: future finance charges (0.2) (0.3) Present value of lease obligations 4.2 5.8

Amounts due for settlement within 12 months 2.7 2.9 Amounts due for settlement after 12 months 1.5 2.9 Present value of lease obligations 4.2 5.8 The Group has entered into a three- and a four-year finance lease arrangement in respect of certain IT equipment.

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17 Financial instruments (a) Financial instruments by category The accounting policies for financial instruments have been applied to the line items below: Financial assets

Assets at fair value through Loans and the income Available- receivables statement for-sale Total £m £m £m £m At 31 December 2013 Cash and cash equivalents 43.8 – – 43.8 Short-term deposits 544.1 – – 544.1 Currency exchange contracts – 5.1 – 5.1 Accounts receivable (gross of impairment provision) 145.9 – – 145.9 Available-for-sale financial assets – unlisted – – 1.2 1.2 Total current financial assets 733.8 5.1 1.2 740.1 Long-term deposits 125.6 – – 125.6 Loans and receivables 3.0 – – 3.0 Available-for-sale financial assets - unlisted – – 13.9 13.9 Total non-current financial assets 128.6 – 13.9 142.5 Total financial assets 862.4 5.1 15.1 882.6 At 31 December 2012 Cash and cash equivalents 46.3 – – 46.3 Short-term deposits 340.0 – – 340.0 Currency exchange contracts – 1.4 – 1.4 Accounts receivable (gross of impairment provision) 126.9 – – 126.9 Total current financial assets 513.2 1.4 – 514.6 Long-term deposits 141.3 – – 141.3 Loans and receivables 2.1 – – 2.1 Available-for-sale financial assets - unlisted – – 13.8 13.8 Total non-current financial assets 143.4 – 13.8 157.2 Total financial assets 656.6 1.4 13.8 671.8

Financial liabilities

2013 2012 £m £m Liabilities at amortised cost at 31 December: Accounts payable 7.0 5.9 Accrued and other liabilities* 56.3 46.8 Finance lease liabilities 4.2 5.8 67.5 58.5 Liabilities at fair value through the income statement at 31 December: Embedded derivatives 7.0 2.5 Total financial liabilities 74.5 61.0 * Non-financial liabilities are excluded from the accrued and other liabilities balance, as this analysis is required only for financial instruments.

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Notes to the financial statements continued

17 Financial instruments continued (a) Financial instruments by category continued Valuation hierarchy As at 31 December 2013, the Group’s financial instrument assets consisted of currency exchange contracts at fair value through the income statement (level 2) of £5.1 million (2012: £1.4 million) and AFS financial assets (level 3) of £1.2 million (current) and £13.9 million (non-current) (2012: £13.8 million non-current). As at 31 December 2013, the Group’s financial instrument liabilities consisted of embedded derivatives (level 2) of £7.0 million (2012: £2.5 million). The Group had no level 1 financial instruments as at 31 December 2013 (2012: £nil). Level 2 currency exchange contracts comprise forward exchange contracts and foreign currency options. The fair value of the forward exchange contracts is determined using forward exchange rates as quoted in an active market. The fair value of foreign currency options is based upon valuations performed by management and the respective banks holding the currency instruments. Level 2 embedded derivatives are fair valued using forward exchange rates that are quoted in an active market. Level 3 AFS financial assets consist of unlisted equity investments and other current investments. The estimated fair value of the unlisted equity investments approximates to cost less any permanent diminution in value (based on management’s estimate of forecast profitability and achievement of set objectives by the relevant entity), except where independent valuation information is obtained, e.g. through the occurrence of funding or other transactions in the relevant entity's equity instruments. The current investment was initially held at the value of the expected licensing programme related to the MIPS patent portfolio. This was estimated by reference to the amounts that it was expected certain potential licensees would be prepared to pay for a licence. At 31 December 2013 the value of the current investment has been based on the amount that is recoverable from an auction process which was held in January 2014. Whilst it is conceivable that a key assumption in the Level 3 calculation could change, the directors believe that no reasonably foreseeable changes to key assumptions would result in a significant change in fair value. Maturity of financial liabilities The table below analyses the Group’s financial liabilities into relevant maturity groupings based on the remaining period from the balance sheet to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances as the impact of discounting is not significant.

Between Between Less than six months and one and Over six months one year two years two years £m £m £m £m At 31 December 2013: Accounts payable 7.0 – – – Accrued and other liabilities 52.8 0.9 2.6 – Finance lease liabilities 1.0 1.7 1.2 0.3 Embedded derivatives 2.4 1.6 2.2 0.8

At 31 December 2012: Accounts payable 5.9 – – – Accrued and other liabilities 46.8 – – – Finance lease liabilities 0.8 2.1 2.2 0.7 Embedded derivatives 0.8 0.7 0.6 0.4 During 2012, the Group entered into a three-month fixed-rate debt facility for $160 million (£99.8 million) to facilitate the contribution to acquire rights to MIPS Technologies, Inc’s portfolio of patents (see note 6). This facility was fully settled by 31 December 2012. The Group had no borrowings during 2013.

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17 Financial instruments continued (a) Financial instruments by category continued Loans and receivables During 2010 the Group invested £2.5 million in an interest-free charitable bond with Future Business. This was recognised in loans and receivables at its initial fair value of £1.9 million, measured using the effective interest method, which resulted in a charge of £0.6 million being recognised as interest payable and similar charges during 2010. In addition, during 2013 the Group invested a further £0.7 million with Future Business. The carrying value of the total loan amounted to £3.0 million at 31 December 2013 (2012: £2.1 million), with £0.1 million being recognised as interest receivable during 2013 (2012: £0.1 million). Short-term deposits The effective interest rate on short-term deposits outstanding at the year end was 1.85% (2012: 2.70%) and these deposits have an average maturity of 178 days (2012: 190 days). Long-term deposits The effective interest rate on long-term deposits outstanding at the year end was 1.65% (2012: 3.32%) and these deposits have an average maturity of 531 days (2012: 489 days). Derivative financial instruments This table analyses the Group’s derivative financial instruments into relevant maturity groupings based on the remaining period from the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Amounts due within 12 months equal their carrying balances as the impact of discounting is not significant.

Over three months Between Less than three but less than six months and Greater than months six months one year one year m m m m Foreign exchange forward contracts – held-for-trading at 31 December 2013 Outflow $98.0 $13.0 $23.0 $9.0 Inflow £60.9 £8.0 £14.7 £6.0 Foreign exchange options – held-for-trading at 31 December 2013 Outflow (maximum) $41.0 $29.3 $26.2 – Inflow (maximum) £26.8 £19.4 £17.6 – Foreign exchange forward contracts – held-for-trading at 31 December 2012 Outflow $51.0 $8.0 $12.0 – Inflow £31.9 £5.0 £7.5 – Foreign exchange options – held-for-trading at 31 December 2012 Outflow (maximum) $38.9 $37.3 $13.5 – Inflow (maximum) £25.3 £24.3 £8.6 – Fair value of currency exchange contracts The fair value of currency exchange contracts is estimated using the settlement rates. The estimation of the fair value of the asset in respect of currency exchange contracts was £5.1 million at 31 December 2013 (2012: £1.4 million). The resulting gains and losses on the movement of the fair value of currency exchange contracts are recognised in the income statement under general and administrative expenses, amounting to a gain of £3.4 million (2012: £8.3 million).

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Notes to the financial statements continued

17 Financial instruments continued (b) Credit quality of financial assets Trade debtors On a quarterly basis, all trade debtors more than three months overdue are considered for impairment on a line-by-line basis. Either a provision is made or the lack thereof is justified, with review by senior members of the Group’s finance team.

2013 2012 £m £m Trade debtors (gross of impairment provision): Not yet due 76.1 80.1 Under 90 days overdue 41.2 27.3 Over 90 days overdue but not provided for 13.2 9.3 Fully provided for 9.8 2.4 Total 140.3 119.1 As shown above, at 31 December 2013 trade debtors less than 90 days overdue amounted to £41.2 million. Of those outstanding at 31 December 2013, £22.8 million had been collected by 3 March 2014 and £15.3 million were owed by large, established customers. Similarly, debtors more than 90 days overdue and not provided for amounted to £13.2 million of which £5.0 million had been collected by 3 March 2014 and £4.2 million was owed by large, established customers. For the remainder, discussions regarding repayment are ongoing and repayment schedules have been agreed with the customers concerned. These will be monitored on a quarterly basis in accordance with the control outlined above. No further analysis has been provided here on the quality of these debts as they are not felt to pose a material threat to the Group’s future results. As shown above, at 31 December 2013, trade debtors fully provided for amounted to £9.8 million (2012: £2.4 million). Of those provided for at 31 December 2013, £4.0 million relates to trade debtors that are up to six months overdue (2012: £0.6 million) and £5.8 million relates to trade debtors that are over six months overdue (2012: £1.8 million). At 31 December 2013, no individual customer accounted for over 10% of accounts receivable (2012: one). Credit risk Financial instrument counterparties are subject to pre-approval by the directors and such approval is limited to financial institutions with a Moody’s rating of at least A2/P-1, a Fitch rating of at least A/F1, or UK building societies with over £2 billion in assets, except in certain jurisdictions where the cash holding concerned is immaterial. At 31 December 2013 and 2012, the majority of the Group’s cash and cash equivalents, short- and long- term deposits were deposited with major clearing banks and building societies in the UK and US in the form of money market deposits and corporate bonds for varying periods of up to three years. At 31 December 2013, 98% (2012: 93%) of the Group’s cash and cash equivalents, and short- and long-term deposits were deposited with major clearing banks and building societies fulfilling these criteria. The majority of the Group’s cash currently falling outside of the counterparty criteria is held with building societies that were within criteria when the deposits were placed. Interest rate risk At 31 December 2013, the Group had £713.7 million (2012: £523.6 million) of interest-bearing assets. At 31 December 2013, 93% (2012: 91%) of interest-bearing assets (comprising cash and cash equivalents, short- and long-term deposits, loans and receivables, and the Group’s convertible loan notes) are at fixed rates and are therefore exposed to fair value interest rate risk. Had interest rates been 1% (100 basis points) lower throughout the year, interest receivable would have reduced by approximately £5.8 million (2012: £5.3 million) and profit after tax by £4.6 million (2012: £4.0 million).

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17 Financial instruments continued (b) Credit quality of financial assets continued Currency risk At 31 December 2013, the Group had outstanding currency exchange contracts to sell $143 million (2012: $71 million) for sterling. In addition, the Group utilises option instruments which have various provisions that, depending on the spot rate at maturity, give either the Group or the counterparty the option to exercise. At 31 December 2013, the Group had outstanding currency options under which the Group may, under certain circumstances, be required to sell up to $97 million (2012: $90 million) for sterling. A common scenario with options of this type is that the spot price at expiry is such that neither the Group nor the counterparty chooses to exercise the option. At 31 December 2013, the Group had $230 million (2012: $190 million) of accounts receivable denominated in US dollars at that date, and US dollar cash and cash equivalents, and short-term deposits of $14 million (2012: $22 million). Thus the Group’s US dollar assets exceeded its currency exchange contracts and currency options at the year end. Management assesses the volume and timing of currency exchange contracts taking into consideration both the current and expected future level of US dollar assets. Based on the predictable nature of the Group’s cash flows, the Group typically has a greater value of currency exchange contracts outstanding than US dollar assets held. As such, after the balance sheet date, the Group has entered into additional currency exchange contracts, returning the Group to its usual position in this regard, at the date of this report. At 31 December 2013, if sterling had strengthened by 10% against foreign currencies with all other variables held constant, post-tax profit for the year would have been £9.5 million lower (2012: £12.1 million lower), mainly as a result of the mix of financial instruments at respective year ends. 18 Share capital

2013 2012 £m £m Authorised 2,200,000,000 ordinary shares of 0.05 pence each (2012: 2,200,000,000) 1.1 1.1

2013 2012 Number of Number of shares Value shares Value m £m m £m Issued and fully paid At 1 January 1,380.8 0.7 1,351.3 0.7 Allotted under employee incentive schemes 19.5 – 29.5 – At 31 December 1,400.3 0.7 1,380.8 0.7 During 2013, the aggregate consideration received on issue of new share capital allotted under employee incentive schemes was £5.9 million (2012: £5.6 million). 19 Acquisitions There were two acquisitions made in 2013: Sensinode Oy, acquired on 19 July 2013 for $11.7 million (£7.7 million), and Geomerics Limited, acquired on 12 December 2013 for £13.4 million. The Group acquired the entire share capital of both entities, which have been accounted for as acquisitions. Sensinode, a company based in Oulu, Finland, is a provider of software technology for the Internet of Things (IoT). Sensinode is a pioneer in software for low-cost, low-power internet-connected devices and has been a key contributor to open standards for IoT. This acquisition enables Sensinode’s expertise and technology to be accessible to the ARM Partnership and through the ARM mbed project it will enable rapid deployment of new and innovative IoT applications. Geomerics, a company based in Cambridge, United Kingdom, is a leader in lighting technology for the gaming and entertainment industries. The acquisition expands ARM's position at the forefront of the visual computing and graphics industries. Additionally, the agreement enables Geomerics to build on their existing partnerships as well as accelerate their development in the mobile market. For the above reasons, combined with the ability to hire the workforce of both Sensinode and Geomerics, including the founders and the management team, the Group paid a premium for both companies, giving rise to goodwill. All intangible assets were recognised at their fair values, with the residual excess over net assets being recognised as goodwill.

101 ARM HOLDINGS PLC Governance and Financial Report 2013

Notes to the financial statements continued

19 Acquisitions continued From 19 July 2013 to 31 December 2013, the acquisition of Sensinode contributed £0.1 million in revenue and incurred a loss of £nil. If Sensinode had been consolidated from 1 January 2013, the consolidated income statement would have included £0.2 million of revenue and £0.9 million of pre-tax loss. From 12 December 2013 to 31 December 2013, the acquisition of Geomerics contributed £nil in revenue and incurred a loss of £0.1 million. If Geomerics had been consolidated from 1 January 2013, the consolidated income statement would have included £0.7 million of revenue and £1.1 million of pre-tax loss. The following table summarises the consideration and provisional fair values of the assets acquired and liabilities assumed at the date of each acquisition.

Sensinode Geomerics 19 July 2013 12 December 2013

£m $m £m Cash, accounts receivable, other current assets, property, plant and equipment 0.3 0.5 0.2 Intangible assets 2.8 4.3 5.0 Accrued and other liabilities (0.5) (0.8) (0.8) Loans payable (1.1) (1.6) – Deferred tax liabilities (net) (0.2) (0.3) (1.0) Net assets acquired 1.3 2.1 3.4 Goodwill 6.4 9.6 10.0 Consideration 7.7 11.7 13.4 The consideration for both acquisitions was paid in cash. All transaction expenses incurred by the Group have been charged to the income statement within general and administrative expenses. Other During 2013 the Group made a payment of £2.0 million (2012: £2.2 million) in respect of time-based and performance bonuses due as a result of the acquisition of Obsidian Software Inc in 2011. The Group also made payments of £0.6 million (2012: £0.8 million) in respect of time-based and performance bonuses due as a result of the acquisition of Prolific Inc in 2011. 20 Share-based payments Since 2006, the Company has issued RSUs to employees, which are actual share awards on vesting rather than options to buy shares at a fixed exercise price. The main RSU awards (to employees in all jurisdictions other than France) vest 25% on each anniversary over four years. RSU awards to our French employees vest 50% after two years, and then a further 25% after three and four years. Additionally, the Company operates a DAB plan. Under the DAB plan, which is for directors and selected senior management within the Group, participants are required to defer 50% of any related annual bonus into shares on a compulsory basis. These shares will be deferred for three years, and then a matching award will be made depending on the achievement of an EPS performance condition over that time. This scheme will be replaced after the February 2014 grant and replaced with a cash-only bonus. For details of the new scheme, see the Remuneration Report on page 41. The Company also operates the LTIP, also for directors and selected senior management, whereby share awards are made and vest depending on the Company’s TSR performance compared to two comparator groups over the three-year performance period. Grants were made for the last time under this scheme in February 2013 and it will be replace by a new LTIP for 2014 grants onwards. For details of the new scheme, see the Remuneration Report on page 42. The Company also offers SAYE schemes for employees and executive directors of the Group. The number of options granted is related to the value of savings made by the employee. The period of savings is three or five years. The option price for grants is set at 80% of the market share price prior to the announcement of the grant, and the right to exercise normally only arises for a six-month period once the savings have been completed. The Company also operates a savings-related option scheme for employees in the US, India, Japan, South Korea and Taiwan, namely the ESPP. The number of options granted is related to the value of savings made by the employee. The period of savings is six months, with the option price being at 85% of the lower of the market share price at the beginning and end of the scheme.

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20 Share-based payments continued The Group has in the past issued share options under several additional schemes, whereby shares in the Company can be granted to employees and directors. Options are granted with a fixed exercise price equal to the market price of the shares under option at the date of grant. These schemes are the UK Inland Revenue Executive Approved Share Option Plan (the “Executive Scheme”), the Unapproved Scheme (the “Unapproved Scheme”), the French Scheme and various schemes that the Company assumed on the acquisition of Artisan in 2004. Shares options in these schemes are no longer granted, although the Company reserves the right to award options to employees going forward. Shares relating to these schemes have all vested in prior years and therefore there is no share-based payment charge associated with them for 2012 or 2013. As disclosed in note 4, staff expenses arising from these share-based compensation schemes of £59.2 million (2012: £37.1 million) were charged to the income statement in the year. This is in line with the Group’s policies for recognition and measurement of the costs associated with these remuneration schemes as outlined in note 1. The fair value of options granted was estimated on the date of grant using the Black-Scholes option pricing model, except for the ESPP whose fair value is the intrinsic value of the award at the date of vest. The following assumptions for each option grant during 2013 and 2012 were as follows: Grant date 16 Feb 2013 23 Jun 2013 30 Apr 2013 31 Oct 2013 16 Feb 2012 23 Jun 2012 16 Aug 2012 Scheme ESPP SAYE ESPP ESPP ESPP SAYE ESPP Share price at grant date £9.25 £7.725 £9.96 £9.94 £5.905 £5.06 £5.74 Exercise price £4.964 £7.9616 £5.6525 £8.449 £4.42 £3.9616 £4.876 Number of employees 391 350 151 605 373 490 372 Shares under option 330,676 210,605 35,386 228,335 333,464 720,922 306,497 Vesting period (years) – 3-5 – – – 3-5 – Expected volatility – 37%-40% – – – 38%-43% – Expected life (years) – 3-5 – – – 3-5 – Risk-free rate – 0.5% – – – 0.5% – Dividend yield – 0.58% – – – 0.69% – Fair value per option £4.286 £1.828-£2.510 £4.3075 £1.491 £1.485 £1.728-£2.175 £0.864

103 ARM HOLDINGS PLC Governance and Financial Report 2013

Notes to the financial statements continued

20 Share-based payments continued The fair value of RSUs, LTIP and DAB awards granted was estimated on the date of grant using the Black-Scholes option pricing model. As all are share awards with no exercise price, all awards have been deemed to have an exercise price of £0.0000001 in the Black-Scholes model. The assumptions for each grant during 2013 and 2012 were as follows: Grant date 8 Feb 2013 8 Feb 2013 8 Feb 2013 8 Feb 2013 8 May 2013 8 May 2013 Scheme DAB RSU French RSU LTIP RSU French RSU Share price at grant date £9.245 £9.245 £9.245 £9.245 £10.46 £10.46 Number of employees 53 2,207 93 55 102 3 Shares awarded 466,174 7,686,539 286,900 742,469 258,224 6,645 Vesting period (years) 3 1-4 2-4 3 1-4 2-4 Expected volatility 37% 30%-37% 35%-37% 37% 30%-38% 34%-38% Expected life (years) 3 1-4 2-4 3 1-4 2-4 Risk-free rate 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% Dividend yield 0.49% 0.49% 0.49% 0.49% 0.43% 0.43% Fair value per share £9.111 £9.067-£9.200 £9.067-£9.155 £9.111 £10.282-£10.415 £10.282-£10.37

Grant date 13 Aug 2013 13 Aug 2013 13 Aug 2013 12 Nov 2013 12 Nov 2013 Scheme RSU French RSU LTIP RSU French RSU Share price at grant date £8.89 £8.89 £8.89 £9.495 £9.495 Number of employees 134 4 1 252 9 Shares awarded 318,934 6,347 11,280 494,746 16,478 Vesting period (years) 1-4 2-4 3 1-4 2-4 Expected volatility 31%-36% 32%-36% 36% 31%-36% 31%-36% Expected life (years) 1-4 2-4 3 1-4 2-4 Risk-free rate 0.5% 0.5% 0.5% 0.5% 0.5% Dividend yield 0.55% 0.55% 0.55% 0.52% 0.52% Fair value per share £8.69-£8.836 £8.69-£8.787 £8.738 £9.30-£9.446 £9.30-£9.397

104 Governance Financial Report

20 Share-based payments continued Grant date 8 Feb 2012 8 Feb 2012 8 Feb 2012 8 Feb 2012 8 May 2012 Scheme DAB RSU French RSU LTIP RSU Share price at grant date £5.68 £5.68 £5.68 £5.68 £5.07 Number of employees 50 1,918 91 54 108 Shares awarded 850,741 3,012,604 128,067 1,102,625 159,720 Vesting period (years) – 1-4 2-4 3 1-4 Expected volatility 39% 34%-45% 39%-45% 39% 37%-42% Expected life (years) 3 1-4 2-4 3 1-4 Risk-free rate 0.5% 0.5% 0.5% 0.5% 0.5% Dividend yield 0.61% 0.61% 0.61% 0.61% 0.69% Fair value per share £5.577 £5.542-£5.671 £5.542- £5.611 £5.577 £4.933-£5.035

Grant date 8 May 2012 13 Aug 2012 13 Aug 2012 12 Nov 2012 12 Nov 2012 Scheme French RSU RSU French RSU RSU French RSU Share price at grant date £5.07 £5.74 £5.74 £7.125 £7.125 Number of employees 4 126 1 159 3 Shares awarded 4,230 213,201 960 275,270 2,490 Vesting period (years) 2-4 1-4 2-4 1-4 2-4 Expected volatility 38%-42% 35%-41% 38%-41% 31%-40% 38%-40% Expected life (years) 2-4 1-4 2-4 1-4 2-4 Risk-free rate 0.5% 0.5% 0.5% 0.5% 0.5% Dividend yield 0.69% 0.66% 0.66% 0.53% 0.53% Fair value per share £4.933-£5.001 £5.592-£5.703 £5.592-£5.665 £6.976-£7.087 £6.976-£7.05 The expected volatility was primarily based upon historical volatility adjusted for past one-time events that are not expected to re-occur. The expected life is the expected period to exercise. A reconciliation of option and share award movements over the year to 31 December 2013 is shown below. Share awards do not have an exercise price and therefore the reconciliation below shows only the number of awards, with no corresponding weighted average exercise prices.

2013 2012 Weighted average RSUs/LTIP/DAB Weighted average RSUs/LTIP/DAB Options Number exercise price Number Options Number exercise price Number Outstanding at 1 January 3,738,922 £1.994 23,255,834 6,581,438 £1.221 35,215,062 Granted 805,002 £6.765 14,972,806 1,360,883 £4.280 14,448,979 Forfeited (57,969) £4.257 (974,255) (234,196) £3.570 (914,068) Lapsed (47,313) £0.575 – (10,589) £0.910 – Exercised (2,468,723) £2.414 (17,026,729) (3,958,614) £1.404 (25,494,139) Outstanding at 31 December 1,969,919 £3.385 20,227,656 3,738,922 £1.994 23,255,834 Exercisable at 31 December 392,451 £0.723 – 985,557 £0.685 –

105 ARM HOLDINGS PLC Governance and Financial Report 2013

Notes to the financial statements continued

20 Share-based payments continued The weighted average share price at the date of exercise or vest of the above share options and awards was £9.29 (2012: £5.72). The following options over ordinary shares were in existence at 31 December: 2013

Weighted Weighted Weighted average average average remaining life remaining life Number exercise price Expected Contractual Exercise price (£) outstanding £ Years Years Outstanding options: 0.7 – 0.854 571,846 0.76 0.49 0.78 1.01 – 1.055 19,166 1.04 0.52 1.05 1.25 1,360 1.25 0.04 0.08 1.948 – 7.96 1,377,547 4.51 2.00 2.25 Total 1,969,919 3.38 1.55 1.81

Outstanding RSU/LTIP/DAB awards: 0.00 (RSUs) 16,792,567 – 1.20 1.20 0.00 (LTIP) 2,054,203 – 1.12 1.12 0.00 (DAB) 1,380,886 – 1.06 1.06 Total 20,227,656 – 1.18 1.18

2012

Weighted Weighted Weighted average average average remaining life remaining life Number exercise price Expected Contractual Exercise price (£) outstanding £ Years Years Outstanding options: 0.47 – 0.854 1,514,873 0.72 0.87 1.37 1.005 – 1.055 46,114 1.04 1.03 2.05 1.25 32,813 1.25 0.54 1.08 1.325 – 4.464 2,145,122 2.93 1.77 1.97 Total 3,738,922 1.99 1.38 1.72

Outstanding RSU/LTIP/DAB awards: 0.00 (RSUs) 16,750,069 – 0.93 0.93 0.00 (LTIP) 4,189,314 – 0.82 0.82 0.00 (DAB) 2,316,451 – 1.06 1.06 Total 23,255,834 – 0.92 0.92

21 Capital and other financial commitments

2013 2012 £m £m Contracts placed for future capital expenditure not provided for in the financial statements 9.8 0.6 Included in the amount for 2013 is £9.1 million of equipment relating to the expansion of the US high-performance computing cluster.

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22 Operating lease commitments – minimum lease payments At 31 December 2013, the Group had commitments under non-cancellable operating leases as follows:

2013 2012 Land and Land and buildings Other Total buildings Other Total £m £m £m £m £m £m The future aggregate minimum lease payments under non- cancellable operating leases are as follows: Within one year 8.5 18.3 26.8 6.8 20.4 27.2 Later than one year and less than five years 23.1 5.3 28.4 16.9 21.5 38.4 After five years 9.0 – 9.0 6.7 – 6.7 At 31 December 40.6 23.6 64.2 30.4 41.9 72.3 The Group leases office buildings and EDA tools software under non-cancellable operating lease agreements. The remaining lease terms are between two and ten years, and the majority of lease agreements are renewable at the end of the lease period at market rate. 23 Financial contingencies It is common industry practice for licensors of technology to offer to indemnify their licensees for loss suffered by the licensee in the event that the technology licensed is held to infringe the IP of a third party. Consistent with such practice, the Group provides such indemnification to its licensees. The obligation for the Group to indemnify its licensees is subject to certain provisos and is usually contingent upon a third party bringing an action against the licensee alleging that the technology licensed by the Group to the licensee infringes such third party’s IP rights. The indemnification obligations typically survive any termination of the licence and will continue in perpetuity. The Group does not provide for any such indemnities unless it has received notification from the other party that they are likely to invoke the indemnity. A provision is made if both of the following conditions are met: (i) information available prior to the issuance of the financial statements indicates that it is probable that a liability had been incurred at the date of the financial statements; and (ii) the amount of the liability can be reasonably estimated. Any such provision is based upon the directors’ estimate of the fair value of expected costs of any such claim. At present, the Group is not a party in any legal proceedings in which the directors believe that it is probable that the resolution of such proceedings will result in a material liability for the Group. Currently, there are legal proceedings against some of the Group’s licensees in which it is asserted that certain of the Group’s technology infringes third-party patents, but in each of those proceedings the Group either presently has no obligation to indemnify, because certain preconditions to indemnification have not been satisfied by such licensees, or to the extent that there is any present obligation to indemnify, the Group does not believe that it is probable that the resolution of such proceedings will result in a material liability for the Group. If preconditions to indemnification are satisfied then an indemnification obligation may arise which could result in a material liability for the Group. 24 Related party transactions During the year ended 31 December 2013 the Group incurred subscription costs of £7.0 million from Linaro Limited, an associated company of the Group, representing ARM’s committed aggregate contributions to Linaro for a period of two years. In respect of the subscription fees, the Group was invoiced £4.3 million during the year to 31 December 2013 (2012: £4.2 million). As at 31 December 2013, £1.0 million (2012: £1.0 million) was owing to Linaro. In addition the Group provided consulting and other services to Linaro amounting to £1.6 million (2012: £1.7 million). All fees have been charged in accordance with the terms of the agreement. As at 31 December 2013, £0.3 million (2012: £1.0 million) was owed to the Group. Further information relating to Linaro is disclosed in note 26. Key management compensation is disclosed in note 3. There were no other related party transactions during 2013 which require disclosure. 25 Post-balance sheet events After the year end, the directors proposed payment of a final dividend in respect of 2013 of 3.6 pence per share. Subject to shareholder approval, the final dividend will be paid on 16 May 2014 to shareholders on the register on 22 April 2014. The final dividend has not been recognised as a distribution during the year ended 31 December 2013.

107 ARM HOLDINGS PLC Governance and Financial Report 2013

Notes to the financial statements continued

26 Principal subsidiaries, associates, and joint ventures Subsidiaries Details of principal subsidiary undertakings are shown below. Not all subsidiaries are included as the list would be excessive in length. A full list is filed in the Group’s Annual Return. All investments are indirectly held unless otherwise shown.

Proportion of total nominal value of Name of undertaking Country of registration Principal activity issued shares held ARM Limited England and Wales Marketing, research and development of RISC-based 100* microprocessors and graphics IP. ARM Inc. US Marketing, research and development of RISC-based 100 microprocessors and physical IP. ARM France SAS France Marketing, research and development of RISC-based 100 microprocessors and physical IP. ARM Norway AS Norway Research and development of graphics IP. 100 ARM Embedded Technologies Pvt. Limited India Marketing, research and development of RISC-based 100 microprocessors and physical IP. ARM Consulting (Shanghai) Co. Limited PR China Marketing, research and development of graphics IP. 100 * The Company itself owns less than 1% of the share capital of ARM Limited, the remaining shares are held indirectly through ARM Finance UK Limited and ARM Finance UK Three Limited. Both ARM Finance UK Limited and ARM Finance UK Three Limited are 100% owned within the Group. Associate During 2010 the Group became a founder member of Linaro, a not-for-profit engineering company created to foster innovation in the Linux community. Linaro (a company incorporated in the UK) is a company limited by guarantee and as such has no shareholders. The Group controls only 25% of the board and therefore considers Linaro to be an associate rather than a subsidiary. The Group has not recognised any associate profit or loss, or net assets on the basis that the entity is not-for-profit. Joint venture In 2012 the Group invested £7.5 million ($12.0 million) in a joint venture, Trustonic Limited (a company incorporated in the UK), representing a 40% shareholding. With the establishment of industry standards and demand for security enhanced services the focus of Trustonic is to accelerate the wide deployment of secure, smart devices. During 2013 the Group invested a further £3.7 million (€4.4 million) into the joint venture, maintaining the 40% shareholding.

2013 2012 Investment in joint venture £m £m At 1 January 6.8 – Investment 3.7 7.5 Share of results for the period (4.0) (0.7) At 31 December 6.5 6.8 The Group’s share of the results of the joint venture, and its aggregated assets and liabilities, are as follows:

Non-current Current Loss for the Current assets assets liabilities Income Expenses Tax year Trustonic Limited £m £m £m £m £m £m £m At 31 December 2013 3.9 6.5 (3.9) 2.5 (6.7) 0.2 (4.0) At 31 December 2012 3.7 4.6 (1.5) – (0.7) – (0.7) The Group’s share of joint venture capital commitments amount to £0.1 million at 31 December 2013 (2012: £0.6 million).

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Company balance sheet/UK GAAP

2013 2012 At 31 December Note £m £m Fixed assets Investments 4 653.3 616.1 Current assets Debtors 5 1.5 0.8 Cash at bank and in hand 0.7 0.9 2.2 1.7 Creditors: amounts falling due within one year 6 (46.0) (3.0) Net current liabilities (43.8) (1.3) Total assets less current liabilities 609.5 614.8 Net assets 609.5 614.8 Capital and reserves Called-up share capital 7 0.7 0.7 Share premium account 8 18.1 12.2 Share option reserve 8 61.4 61.4 Profit and loss reserve 8 529.3 540.5 Total shareholders’ funds 9 609.5 614.8 The financial statements on pages 109 to 114 were approved by the Board of directors on 5 March 2014 and were signed on its behalf by:

Simon Segars, Tim Score, Chief Executive Officer Chief Financial Officer

109 ARM HOLDINGS PLC Governance and Financial Report 2013

Notes to the financial statements/UK GAAP

1 Principal accounting policies The financial statements have been prepared in accordance with the Companies Act 2006 and applicable accounting standards in the UK. A summary of the more important accounting policies, which have been consistently applied and reviewed by the board of directors in accordance with Financial Reporting Standard (FRS) 18, “Accounting policies”, is set out below: Basis of accounting The financial statements are prepared on a going concern basis and in accordance with the historical cost convention. Investments in subsidiaries Investments in subsidiaries are initially recorded at cost. Where an acquisition satisfies the provisions of section 612 of the Companies Act 2006 for merger relief, the investment is stated at the nominal value of shares issued plus the fair value of any other consideration. Cash flow statement The Company has not presented a separate cash flow statement. The cash flows for the Company are included within the consolidated financial statements. Foreign currency Transactions denominated in foreign currencies have been translated into sterling at actual rates of exchange at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies have been translated at the closing rates of exchange at the balance sheet date. Exchange differences have been included in operating profit. Taxation Current tax is provided at amounts expected to be paid using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Financial instruments The Company does not have any financial instruments, other than intercompany creditors and debtors, and cash. Due to the short-term nature of these balances, the Company considers the fair value of these items to equal the carrying value. Because the Company is included in the consolidated financial statements of the ARM Holdings plc Group which are publicly available, and the financial disclosures required by FRS 29 are in note 17 of those financial statements, no disclosure has been presented in these financial statements. Share schemes The Company issues equity-settled share-based payments, including an LTIP, to certain employees of subsidiary undertakings. In accordance with FRS 20, equity-settled share-based payments are measured at fair value at the date of grant. Fair value is measured by use of the Black-Scholes pricing model. The fair value determined at the grant date of the equity-settled share-based payments is expensed in the accounts of the subsidiary companies on a straight-line basis over the vesting period, based on the Company’s estimate of the number of shares that will eventually vest. The Company operates SAYE schemes in the UK and an ESPP in the US, India, Japan, South Korea and Taiwan. Options under the SAYE scheme were at a 20% discount to market price of the underlying shares on the date of announcement of the scheme. The UK SAYE schemes are approved by the Inland Revenue, which stipulates that the saving period must be at least 36 months. The Company has taken advantage of the exemption available, and has applied the provisions of FRS 20 only to those options granted after 7 November 2002 and which were outstanding at 31 December 2004. The Company does not have any employees and as such, in accordance with UITF 44, all share-based payments have been recorded as capital contributions to all subsidiaries. The Company recharges the relevant amount of the share-based payments to its US subsidiary. Consequently, the amount recharged is offset against the carrying value of its investments. Share capital Ordinary shares issued by the Company are recorded at the proceeds received, net of direct issue costs. Dividends A liability is recorded for a dividend when the dividend is approved by the Company’s shareholders. Interim dividends are recognised as a distribution when paid. Deferred tax Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date. Deferred tax is measured at the average rates that are expected to apply in the period in which the timing difference is expected to reverse, based on tax rates and laws that have been enacted or substantially enacted by the balance sheet date. Deferred tax is measured on an undiscounted basis.

110 Governance Financial Report

2 Profit for the financial year As permitted by Section 408 of the Companies Act 2006, the parent company’s profit and loss account has not been included in these financial statements. The parent company’s loss after taxation, including dividends receivable and before dividends payable was £1.5 million (2012: £1.9 million). The Company has no employees; all three executive directors (as at 31 December 2013) have contracts of service with ARM Limited, a subsidiary of the Company. The emoluments of two of these directors are paid by ARM Limited, and one of the directors is paid by ARM Inc, the details of which are disclosed in the remuneration report within this Annual Report. Audit fees are disclosed in note 5 to the consolidated financial statements on page 84. 3 Dividends paid and proposed

2013 2012 £m £m Final dividend paid of 2.83 pence per ordinary share in respect of 2012 (2012: 2.09 pence in respect of 2011) 39.5 28.8 Interim dividend paid of 2.10 pence (2012: 1.67 pence) per ordinary share 29.4 23.0 68.9 51.8 In addition, the directors are proposing a final dividend in respect of the financial year ended 31 December 2013 of 3.6 pence per share which will absorb an estimated £51 million of shareholders’ funds. It will be paid on 16 May 2014 to shareholders who are on the register of members on 22 April 2014, subject to approval by the shareholders at the 2014 AGM. 4 Investments The cost and net book value of interests in Group undertakings held by the Company was £653.3 million at 31 December 2013 and £616.1 million at 31 December 2012. The Company took advantage of merger relief in 2004 and did not record the premium on the issue of shares for the acquisition of Artisan Components Inc. (now ARM Inc.), and thus did not record the premium within the value of the investment in the Company balance sheet at that time.

Investments in subsidiary undertakings £m Cost and net book value At 1 January 2013 616.1 Additions 0.1 Capital contributions arising from share-based payments 59.2 Recharge to subsidiary of share-based payments (22.1) At 31 December 2013 653.3 Where options and awards over the Company’s shares have been issued to the employees of subsidiary undertakings, the fair value of employee services performed (equal to the share-based payments) has been recorded as a capital contribution. The Company recharges the relevant amount of the share-based payments to its US subsidiary. Consequently, the amount recharged is offset against the carrying value of its investments. The directors believe that the carrying value of the investments is supported by their underlying net assets. Interests in Group undertakings Details of subsidiary undertakings are as follows:

Proportion of nominal value Country Description of issued Name of undertaking of registration of shares held shares held ARM Limited England and Wales Ordinary £1 shares less than 0.01%* ARM IP Limited England and Wales Ordinary £1 shares 100% ARM Finance UK Limited England and Wales Ordinary $1 shares 100% * The Company itself owns less than 1% of the share capital of ARM Limited, the remaining shares are held indirectly through ARM Finance UK Limited and ARM Finance UK Three Limited. Both ARM Finance UK Limited and ARM Finance UK Three Limited are 100% owned within the Group.

111 ARM HOLDINGS PLC Governance and Financial Report 2013

Notes to the financial statements/UK GAAP continued

4 Investments continued The principal activity of ARM Limited is the marketing, research and development of RISC-based microprocessors and graphics IP. The remaining shares in ARM Limited were held at the balance sheet date by ARM Finance UK Limited (AFL) and ARM Finance UK Three Limited (AFL3) (with AFL3 itself being an indirect wholly owned subsidiary of AFL). The principal activities of both AFL and AFL3 are as intermediate holding companies. 5 Debtors

2013 2012 £m £m Prepayments and accrued income 1.2 0.5 Deferred tax assets * 0.3 0.3 1.5 0.8 * A deferred tax asset in respect of timing differences arising on losses has been recognised, and it is expected that profits will be available in the future to offset these losses. 6 Creditors: amounts falling due within one year

2013 2012 £m £m Amounts owed to Group undertakings 45.7 2.7 Accruals 0.3 0.3 46.0 3.0 7 Called-up share capital

2013 2012 £m £m Authorised 2,200,000,000 ordinary shares of 0.05 pence each (2012: 2,200,000,000) 1.1 1.1 Allotted, called-up and fully paid 1,400,263,804 ordinary shares of 0.05 pence each (2012: 1,380,768,350) 0.7 0.7 19,495,454 ordinary shares of 0.05 pence each were issued in the year for cash consideration of £5.9 million (2012: £5.6 million) as a result of the exercise of share options at various times during the year. Share options and awards The Company had the following options and awards outstanding over ordinary shares of 0.05 pence at 31 December 2013:

Weighted Range of average exercise Number exercise prices price Latest date Year of grant of options £ £ of exercise Executive Scheme 2004 1,360 1.25 1.25 29 January 2014 2005 14,166 1.055 1.055 3 February 2015 15,526 1.072 2003 Plan 2004 376,925 0.7-1.01 0.7086 29 November 2014 SAYE 2009 199,921 0.854 0.854 31 January 2015 2010 126,730 1.948 1.948 31 January 2016 2011 363,300 4.464 4.464 31 January 2017 2012 680,302 3.9616 3.9616 31 January 2018 2013 207,215 7.96 7.96 31 January 2019 1,577,468 4.0469 Total options 1,969,919 3.3847

112 Governance Financial Report

7 Called-up share capital continued

Number Year of grant of share awards Latest vest date RSU 2010 2,417,436 12 November 2014 2011 2,833,120 12 November 2015 2012 2,410,868 12 November 2016 2013 8,404,823 12 November 2017 16,066,247 French RSU 2010 128,769 12 November 2014 2011 153,375 12 November 2015 2012 130,087 12 November 2016 2013 314,089 12 November 2017 726,320 LTIP 2011 621,132 8 February 2014 2012 782,375 8 February 2015 2013 650,696 8 February 2016 2,054,203 DAB 2011 430,102 8 February 2014 2012 586,666 8 February 2015 2013 364,118 8 February 2016 1,380,886 Total awards 20,227,656 Total options and awards 22,197,575 Since 2006, the Company has issued RSUs to employees, which are actual share awards on vesting rather than options to buy shares at a fixed exercise price. The main RSU awards (to employees in all jurisdictions other than France) vest 25% on each anniversary over four years. RSU awards to our French employees vest 50% after two years, and then a further 25% after three and four years. Additionally, the Company operates a DAB plan. Under the DAB plan, which is for directors and selected senior management within the Group, participants are required to defer 50% of any related annual bonus into shares on a compulsory basis. These shares will be deferred for three years, and then a matching award will be made depending on the achievement of an EPS performance condition over that time. This scheme will be replaced after the February 2014 grant and replaced with a cash-only bonus. For details of the new scheme, see the Remuneration Report on page 41. The Company also operates the LTIP, also for directors and selected senior management, whereby share awards are made and vest depending on the Company’s TSR performance compared to two comparator groups over the three-year performance period. Grants were made for the last time under this scheme in February 2013 and it will be replaced by a new LTIP for 2014 grants onwards. For details of the new scheme, see the Remuneration Report on page 42. The Company also offers SAYE scheme for employees and executive directors of the Group. The number of options granted is related to the value of savings made by the employee. The period of savings is three or five years. The option price for grants is set at 80% of the market share price prior to the announcement of the grant, and the right to exercise normally only arises for a six-month period once the savings have been completed. The Company also operates a savings-related option scheme for employees in the US, India, Japan, South Korea and Taiwan, namely the ESPP. The number of options granted is related to the value of savings made by the employee. The period of savings is six months, with the option price being at 85% of the lower of the market share price at the beginning and end of the scheme. The Group has in the past issued share options under several additional schemes, whereby shares in the Company can be granted to employees and directors. Options are granted with a fixed exercise price equal to the market price of the shares under option at the date of grant. These schemes are the UK Inland Revenue Executive Approved Share Option Plan (the “Executive Scheme”), the Unapproved Scheme (the “Unapproved Scheme”), the French Scheme and various schemes that the Company assumed on the acquisition of Artisan in 2004. Shares in these schemes are no longer granted, although the Company reserves the right to award options to employees going forward. Shares relating to these schemes have all vested in prior years and therefore there is no share-based payment charge associated with them for 2012 or 2013.

113 ARM HOLDINGS PLC Governance and Financial Report 2013

Notes to the financial statements/UK GAAP continued

7 Called-up share capital continued For disclosures relating to the grants in the year and fair value assumptions, reconciliations of opening to closing option balances, and related items, please refer to note 20 in the consolidated financial statements. 8 Reserves

Share premium Share option Profit and account reserve loss reserve £m £m £m At 1 January 2013 12.2 61.4 540.5 Premium on issue of share options 5.9 – – Credit in respect of capital contributions arising from share-based payments – – 59.2 Loss attributable to shareholders – – (1.5) Equity dividends payable – – (68.9) At 31 December 2013 18.1 61.4 529.3 The share option reserve represents the fair value of options granted on the acquisition of Artisan Components Inc. in 2004. The Company considers the share option reserve and share premium account as non-distributable. Within the profit and loss reserve are credits in respect of FRS 20 employee share-based payments in respect of services performed by employees of subsidiary undertakings and recorded as a capital contribution. The Company also considers these credits as non-distributable. As such, approximately £324 million of the profit and loss reserve is deemed distributable. The Company did not undertake any share buy-backs during 2013. The quantum and frequency of share repurchases is not predetermined and will take into account prevailing market conditions, the short- to medium-term cash needs of the business and the level of employee share-based remuneration going forward. At 31 December 2013, there were nil (2012: nil) shares in the Company still held from purchases made in prior years. 9 Reconciliation of movements in shareholders’ funds

2013 2012 £m £m Loss attributable to shareholders (1.5) (1.9) Equity dividends payable (68.9) (51.8) (70.4) (53.7) New share capital issued 5.9 5.6 Credit in respect of capital contributions arising from share-based payments 59.2 37.1 Net reduction to shareholders’ funds (5.3) (11.0) Opening shareholders’ funds 614.8 625.8 Closing shareholders’ funds 609.5 614.8

10 Capital commitments The Company had no capital commitments at 31 December 2013 and 2012. 11 Financial commitments and contingencies At 31 December 2013 and 2012 the Company had no annual commitments under non-cancellable operating leases and no contingencies. 12 Related party transactions The Company has taken advantage of the exemption from disclosure available to parent companies under FRS 8, “Related party disclosures”, where transactions and balances between wholly owned Group entities have been eliminated on consolidation. 13 Post-balance sheet events After the year end, the directors proposed payment of a final dividend in respect of 2013 of 3.6 pence per share. Subject to shareholder approval, the final dividend will be paid on 16 May 2014 to shareholders on the register on 22 April 2014. The final dividend has not been recognised as a distribution during the year ended 31 December 2013.

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Independent Auditors’ Report to the Members of ARM Holdings plc

Report on the parent company financial statements Our opinion In our opinion the parent company financial statements, defined below: • give a true and fair view of the state of the Company’s affairs as at 31 December 2013; • have been properly prepared in accordance with UK Generally Accepted Accounting Practice; and • have been prepared in accordance with the requirements of the Companies Act 2006. This opinion is to be read in the context of what we say in the remainder of this report. What we have audited The parent company financial statements, which are prepared by ARM Holdings plc, comprise: • the parent company balance sheet as at 31 December 2013; • the notes to the parent company financial statements, which include a summary of significant accounting policies and other explanatory information. The financial reporting framework that has been applied in their preparation comprises applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice). In applying the financial reporting framework, the directors have made a number of subjective judgements, for example in respect of significant accounting estimates. In making such estimates, they have made assumptions and considered future events. What an audit of financial statements involves We conducted our audit in accordance with International Standards on Auditing (UK & Ireland) (“ISAs (UK & Ireland)”). An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: • whether the accounting policies are appropriate to the parent company’s circumstances, and have been consistently applied and adequately disclosed; • the reasonableness of significant accounting estimates made by the directors; • the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report and accounts (the “annual report”) to identify material inconsistencies with the audited parent company financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinions on matters prescribed by the Companies Act 2006 In our opinion: • The information given in the Strategic report and the Directors’ report for the financial year for which the parent Company financial statements are prepared is consistent with the parent company financial statements. • The part of the Directors’ Remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006.

115 ARM HOLDINGS PLC Governance and Financial Report 2013

Independent Auditors’ Report to the Members of ARM Holdings plc continued

Other matters on which we are required to report by exception Adequacy of accounting records and information and explanations received Under the Companies Act 2006 we are required to report to you if, in our opinion: • we have not received all the information and explanations we require for our audit; or • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or • the parent company financial statements and the part of the Directors’ Remuneration report to be audited are not in agreement with the accounting records and returns. We have no exceptions to report arising from this responsibility. Directors’ remuneration Under the Companies Act 2006 we are required to report if, in our opinion, certain disclosures of directors’ remuneration specified by law have not been made. We have no exceptions to report arising from this responsibility. Other information in the annual report Under ISAs (UK & Ireland), we are required to report to you if, in our opinion, information in the annual report is: • materially inconsistent with the information in the audited parent company financial statements; or • apparently materially incorrect based on, or materially inconsistent with, our knowledge of the parent company acquired in the course of performing our audit; or • is otherwise misleading. We have no exceptions to report arising from this responsibility. Responsibilities for the financial statements and the audit Our responsibilities and those of the directors As explained more fully in the Directors’ Responsibilities Statement, the directors are responsible for the preparation of the parent company financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the parent company financial statements in accordance with applicable law and ISAs (UK & Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Other matter We have reported separately on the Group financial statements of ARM Holdings plc for the year ended 31 December 2013.

Charles Bowman Senior Statutory Auditor for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 5 March 2014

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Glossary

Apps Application software that runs within the chip. ARM7/9/11 ARM7 processor was one of ARM’s first commercial products. ARM9 and ARM11 processors followed later. ARMv8 Latest family of ARM processor designs. big.LITTLE Combination of two different ARM processors on a single chip: one (big) that delivers high-performance when needed with the other (LITTLE) running most of the time, enabling long battery-life. CAGR Compound annual growth rate. Cortex ARM’s latest family of processors. DTV Digital TV. Ecosystem Community of companies that work with ARM, including semiconductor companies, foundries, OEMs and software providers. Fabless semiconductor company A fabless semiconductor company designs computer chips. These chips are typically manufactured by a foundry. For example Mediatek, NVIDIA and Qualcomm. Foundry A foundry is a specialist company that manufacturers computer chips on behalf of fabless semiconductor companies. For example TSMC and UMC. Intellectual Property (IP) ARM designs technology for use in computer chips. The general term for the products that are designs only, or are creations of the mind, is intellectual property. Internet of Things (IoT) An increasing variety of digital devices are being connected to the internet either directly or indirectly via a smartphone. From pedometers to thermostats to streetlights. Licence A licence is a legal agreement that confers certain rights to our Partners. They pay an upfront free, which is reported as “licence revenue”. LTE Long Term Evolution (or 4G) is the next generation wireless standard for mobile phones. It is optimised for data streaming allowing internet connections at speeds similar to broadband in the home. Mali ARM’s family of 3D graphics processors. Microcontroller (MCU) A microcontroller is a general-purpose computer chip which has been/can be used in many applications. Most ARM processors are used in either an SoC or MCU. Original Equipment Manufacturer An OEM manufactures consumer products such as TVs or mobile phones. For example Apple, HTC (OEM) and LG. Partner A Partner is a licensee of ARM’s processor technology. Physical IP Design of the building blocks used in the implementation a SoC design. Processor Design of the brain of the computer chip. Processor Optimisation Pack (POP) Physical IP components that have been selected and optimised to implement a processor on a specific foundry’s manufacturing process. Royalty ARM receives a royalty on every chip that contains ARM technology. The royalty is usually a percentage of the selling price of the chip and is reported as “royalty revenue”. STB Set-top box. System-on-Chip (SoC) A SoC is a computer chip where multiple functions have been integrated into a single chip. Most ARM processors are used in either an SoC or MCU.

117 ARM HOLDINGS PLC Governance and Financial Report 2013

Group directory

ARM Holdings plc Miniparc Polytec Tel: +1 408 576 1500 110 Fulbourn Road 60 Rue des Berges Fax: +1 408 576 1501 Cambridge CB1 9NJ 38000 Grenoble The Park on Barton Creek United Kingdom France 3711 S. Mopac Expressway Tel: +44 (0) 1223 400400 Tel: +33 4 56 38 47 00 Building 1, Suite 400 Fax: +44 (0) 1223 400410 Fax: +33 4 56 38 47 01 Austin, TX 78746 ARM Limited ARM Germany GmbH United States Liberty House Bretonischer Ring 16 Tel: +1 512 327 9249 Moorbridge Road D-85630 Grasbrunn Fax: +1 512 314 1078 Maidenhead Germany 5 East Street Berkshire SL6 8LT Tel: +49 89 456 040-0 Franklin, MA 02038 United Kingdom Fax: +49 89 456 040-19 United States Tel: +44 (0) 1628 427700 Obrtna Cesta 18 Tel: +1 970 532 0767 Fax: +44 (0) 1628 427701 SL-8310 Fax: +1 508 520 1907 Rockingham Court Sentjernej 2 Venture Suite 470 152 Rockingham Street Slovenia Irvine, CA 92618 Sheffield S1 4EB ARM Israel United States United Kingdom 3 Hagavish Street Tel: +1 408 576 1500 Tel: +44 (0) 114 282 8000 44424 Kfar Saba Fax: +1 949 623 8305 Fax: +44 (0) 114 282 8001 Israel 4965 Preston Park Blvd Blackburn Design Centre Tel: +972.9.7644888 Suite 650 Belthorn House Fax: +972.9.7644884 Plano, TX 75093 Walker Road ARM Norway AS United States Blackburn BB1 2QE Olav Tryggvassons gt. 39-41 Tel: +1 972 312 1107 United Kingdom 7011 Trondheim Fax: +1 972 312 1159 Tel: +44 (0) 1254 893900 Norway Fax: +44 (0) 1254 893901 2002 Caton Way SW Tel: +47 7318 7500 Olympia Geomerics Limited Fax: +47 7351 3181 WA 98502-1119 110 Fulbourn Road ARM Sweden AB United States Cambridge Lilla Fiskaregatan 12 Tel: +1 408 576 1500 CB1 9NJ SE-222 22 Lund United Kingdom 5375 Mira Sorrento Place Sweden Tel: +44 (0) 1223 400400 Suite 290 Tel: +46 46 540 11 04 San Diego, CA 92121 ARM France SAS Fax: +46 46 14 48 08 United States 12 Avenue des Prés ARM Finland Oy Tel: +1 858 453 1900 BL204 Montigny le Konekuja 2 Bretonneux 2320 130th Avenue NE Fl-90620 Oulu 78059 Saint Quentin en Building E, Suite 220 Finland Yvelines, Cedex Bellevue Tel: +358 10 387 8680 France WA 98005 Tel: +33 1 39 30 47 89 ARM Belgium Services BVBA United States Fax: +33 1 39 30 47 88 Mechelsesteenweg 277 Tel: +1 408 576 1500 1800 Vilvoorde 25 Allée Pierre Ziller ARM KK Belgium Le Paros Shinyokohama Square Bldg. 17F Tel: +32 2 3045598 BP 70124 2-3-12 Shin-Yokohama 06903 Sophia Antipolis Cedex ARM Inc. Kohoku-Ku, Yokohama-Shi France 150 Rose Orchard Way Kanagawa 222-0033 Tel: +33 4 97 23 51 00 San Jose, CA 95134-1358 Japan Fax: +33 4 97 23 51 99 United States Tel: +81 45 477 5260 Fax: +81 45 477 5261 118 Governance Financial Report

ARM Korea Limited Unit 13B01, Anlian Plaza ARM Consulting 8th Floor Kyungdong Building No.4018, Jin Tian Road (Shanghai) Co. Ltd 4-4 Sunae-Dong Futian District 35F, Building B, Bundang-Gu, Seongnam-si Shenzhen 518006 New CHJ International Business Centre Gyeonggi-do 463-020 PR China No. 391 Guiping Road Korea Tel: +86 755 8280 4836 Shanghai 200233 Tel: +82 31 712 8234 Fax: +86 755 8280 4839 PR China Fax: +82 31 713 8225 Tel: +86 21 6154 9000 ARM Taiwan Limited ARM Embedded Fax: +86 21 6154 9100 8F, No. 36, Ruihu Street Technologies Pvt. Limited Nei-Hu District Room 602, Ideal Plaza Bagmane World Technology Center – SEZ Taipei City 58 West Road Citrine Block, 5th and 6th Floor 11494 North 4th Ring Road Marathahalli Outer Ring Road Taiwan (R.O.C) Haidian District Mahaderapura Tel: +886 2 8752 1700 Beijing 100080 Bangalore 560048 Fax: +886 2 2627 1682 PR China Tel: +91 80 4928 2000 Tel: +86 10 8217 2000 7F, No. 2, Li-Hsin Fax: +91 80 4112 7403 Fax: +86 10 8217 2010 6th Road Hsinchu Science Park Unit no: F2 (II), 2nd Floor Hsinchu City S.B. Towers, Plot no: IA/I Sector 16A 30078 Film City, Noida – 201301 Taiwan (R.O.C.) Uttar Pradesh Tel: +886 3 565 7100 Fax: +886 3 567 7128

119 ARM HOLDINGS PLC Governance and Financial Report 2013

Key shareholder information

ARM Holdings plc is the parent Legal advisers company of the Group UK Law Company Number: 2548782 Slaughter and May Incorporated in England & Wales One Bunhill Row Domiciled in the UK London EC1Y 8YY Public company limited by shares United Kingdom Secretary and registered office Linklaters Patricia Alsop One Silk Street 110 Fulbourn Road London EC2Y 8HQ Cambridge CB1 9NJ United Kingdom United Kingdom US Law Independent auditors Davis Polk & Wardwell PricewaterhouseCoopers LLP 99 Gresham Street 1 Embankment Place London EC2V 7NG London WC2N 6RH United Kingdom United Kingdom

Stockbrokers For more shareholder information please UBS Limited contact Ian Thornton at 2 Finsbury Avenue [email protected] London EC2M 2PP United Kingdom Our website contains information for shareholders, including regular strategic,

business and financial updates. Goldman Sachs Peterborough Court www.arm.com/ir 133 Fleet Street London EC4A 2BB United Kingdom Registrars Equiniti Aspect House Spencer Road Lancing West Sussex BN99 6DA United Kingdom Shareholder Helpline 0871 384 2139 Depositary The Bank of New York Mellon 101 Barclays Street New York New York 10286 United States of America

120 ARM Holdings plc Governance and Financial Report 2013

ARM’s annual report is in two parts. The Strategic Report contains The Governance and Financial Report contains the details about information about the Group, how we make money and how we run how we run the business and remunerate management, and how the business. It includes our strategy, business model, markets and we organise ourselves financially. key performance indicators, as well as our approach to governance, sustainability and risk management, and a summary of our Online you can find more information about our end markets, financial management. including case studies about how our technology is used in our customers’ products. A more detailed Corporate Responsibility report is also available online. Governance and Financial Report Strategic report Online reporting

Governance Our Vision Front cover Most major population centres are now Chairman’s introduction 1 Operational highlights covered by 3G or 4G networks, and there Board of directors 4 Financial highlights were more than two billion smartphones and tablets connecting to the internet in Corporate governance 6 Chairman’s review 2013. With some mobile computers now costing as little as $35, many more people Directors’ report 23 Chief Executive’s statement can now afford to buy a smart device. Directors’ remuneration report 29 Our Performance An entry-level mobile computer may have up to four ARM®‑based chips. Financial Report Our marketplace Downloads Independent auditors’ report to the Our business model More information about ARM and our members of ARM Holdings plc 55 end market opportunities are available Our global reach on our website. Consolidated income statement 60 Strategy and key Reports available online: Consolidated statement performance indicators of comprehensive income 60 Mobile computing Strategic Report Consolidated balance sheet 61 Enterprise infrastructure Governance and Financial Report Consolidated cash flow statement 62 Embedded computing Corporate Responsibility report Consolidated statement of changes in shareholders’ equity 63 Our Commitment www.arm.com/reporting2013 Notes to the financial statements 64 Governance Company balance sheet/UK GAAP 109 Sustainability Notes to the financial statements/ Risk management and principal risks UK GAAP 110 Our Financial Report Independent auditors’ report to the members of ARM Holdings plc 115 Financial Report

Glossary and Group directory

Glossary 117 Group directory 118 Key shareholder information 120 ARM Holdings plc 110 Fulbourn Road Cambridge CB1 9NJ United Kingdom Telephone +44 (0)1223 400400 Facsimile +44 (0)1223 400410 www.arm.com twitter: @ARMCommunity pinterest: ARMLtd facebook.com/ARMfans youtube.com/armflix effective governance and strong Financial performance

ARM Holdings plc

Annual Report 2013: Governance & Financial Report